Compound deflation reduces cumulative price drop below simple arithmetic

Steps:

• Annual 2% deflation multiplies price level by 0.98 each year.
• Over four years, price level = initial × (0.98)^4 ≈ initial × 0.9224.
• Resulting drop = 1 - 0.9224 = 0.0776, or 7.76%.
• This compound fall is less than simple 4 × 2% = 8%.

Why B is correct:

• Real value refers to effective purchasing power adjusted for compounding; since prices fell 7.76%, real value rose ~8.4%, meaning any implied "fall" in value terms is less than 8% (actually a gain).

Why the others are wrong:

• A: Simple addition ignores compounding, overstating the fall at exactly 8%.
• C: True for nominal price level drop, but misses focus on real value's inverse gain.
• D: Real value of money rose ~8.4%, so it did not fall at all.

Final answer: B