Anita Job is the new Treasury Secretary and she is trying to interpret the inflation measures for two consecutive years. In Year 1, the aggregate price level increased by 8% and in Year 2, the aggregate price level increased by 5%. What term describes the change in the price level from Year 1 to Year 2? a. disinflation b. conflation c. deflation

The correct answer is A. Disinflation.

Explanation:

The disinflation process consists in subjecting the economy, for a certain period of time, to a cooling process by applying a policy of contractive demand in order to bend inflationary pressures.

A matter of enormous interest in economic policy is related to the fact that once certain factors have caused price rises and inflationary expectations have been generated, their reduction may imply high costs in terms of production and employment, as evidenced by the experience itself European or the deflation carried out in the United States in the first half of the 80s. That is to say, that once caused the increase in inflation, economic policy, and monetary policy in particular, it faces the need to compare the costs derived from disinflation, with the expected long-term benefits of the lower inflation rate. Tobin (1987), for example, expressed this idea by stating that "the central question is whether social investment in sufficient unemployment for sufficient time to reduce inflation is subsequently compensated by the real advantages of permanently lower inflation."