Consider the following statements : 1. When the inflation decreases, but still remains positive, it is deflation. 2. Deflation reduces the real value of money over time. 3. Historically not all episodes of deflation correspond with periods of poor economic growth. Which of the statements given above is/are correct ?

Statement 1 is incorrect because a decrease in the inflation rate while it remains positive is defined as disinflation, not deflation [t3]. Deflation occurs only when the inflation rate becomes negative, representing a sustained decrease in the general price level [c1][t3]. Statement 2 is incorrect because deflation increases the real value of money and its purchasing power, as the same amount of currency can buy more goods over time [c1][c2][t7]. Statement 3 is correct; historically, not all deflationary episodes are linked to poor growth. Economists distinguish between 'bad' deflation (recessionary) and 'good' or 'growth' deflation, where technological advances or increased supply lead to falling prices alongside economic expansion [t1][t2][t6]. Research indicates that the reflexive association of deflation with economic weakness is not always supported by the historical record [t4].

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > Deflation > p. 74
2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 113
3. [3] https://en.wikipedia.org/wiki/Deflation