Negative Inflation Reduces Price Levels

Steps:

• Define cost of living as the amount of money needed to maintain a standard of living, primarily driven by price levels.
• Recall that inflation measures the rate of price increase; negative inflation (deflation) means prices are falling.
• Link falling prices to lower cost of living, as goods and services become cheaper.
• Evaluate options to identify which guarantees price decline.

Why C is correct:

• Negative inflation, or deflation, directly means a sustained decrease in the general price level, reducing the cost of living by definition.

Why the others are wrong:

• A: A fall in real incomes lowers purchasing power but does not change price levels, so cost of living remains unchanged.
• B: A fall in the inflation rate (e.g., from 5% to 2%) still means rising prices, just slower, so cost of living continues to increase.
• D: A reduction in direct tax rates increases disposable income but does not affect price levels, leaving cost of living unchanged.

Final answer: C