(a) What is deflation?
(b) Outline any three positive effects of deflation.
(c) Explain the ways by which inflation affects any three functions of money.
(b) Outline any three positive effects of deflation.
(c) Explain the ways by which inflation affects any three functions of money.
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Correct Answer: Option n
Explanation:
(a) Deflation is a period of persistent fall in the general level of prices of goods and services.
(i) Money lenders/ creditors gain because money paid back has higher value.
(ii) Improvement in balance of payments due to increase in exports.
(iii) Fixed income earners/creditors gain because money buys more baskets of goods.
(iv) Increase in the value of money as a result of falling prices.
(v) Savings are encouraged because cost of living is low.
(vi) Standard of living will increase as a result of reduction in the cost of living.
(c)(i) Medium of exchange - during inflation people are likely to lose confidence in money as means of payment for goods and services because of a fall in its value.
(ii) Store of value - the function of money as a store of wealth is undermined during periods of inflation because the money saved loses value.
(iii) Standard of deferred payment - during inflation money does not serve as an adequate standard of deferred payment because money loses value.
(iv) Unit of account/measure of value - during inflation, money is not a reliable unit of account because its own value is not stable.
(a) Deflation is a period of persistent fall in the general level of prices of goods and services.
(i) Money lenders/ creditors gain because money paid back has higher value.
(ii) Improvement in balance of payments due to increase in exports.
(iii) Fixed income earners/creditors gain because money buys more baskets of goods.
(iv) Increase in the value of money as a result of falling prices.
(v) Savings are encouraged because cost of living is low.
(vi) Standard of living will increase as a result of reduction in the cost of living.
(c)(i) Medium of exchange - during inflation people are likely to lose confidence in money as means of payment for goods and services because of a fall in its value.
(ii) Store of value - the function of money as a store of wealth is undermined during periods of inflation because the money saved loses value.
(iii) Standard of deferred payment - during inflation money does not serve as an adequate standard of deferred payment because money loses value.
(iv) Unit of account/measure of value - during inflation, money is not a reliable unit of account because its own value is not stable.