Negative Inflation Lowers Prices Directly

Steps:

• Define cost of living as the expense to maintain a standard of living, typically tracked by the Consumer Price Index (CPI).
• Recognize that inflation measures the rate of price changes; positive inflation raises prices, while negative inflation (deflation) lowers them.
• Identify that only a factor guaranteeing falling prices will certainly reduce the cost of living.

Why C is correct:

• Negative inflation, or deflation, means the general price level falls (CPI decreases), directly reducing the cost of goods and services needed for living.

Why the others are wrong:

• A: A fall in real incomes reduces 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: Reducing direct tax rates boosts disposable income but does not lower prices, leaving the cost of living unaffected.

Final answer: C