Assume the following annual price levels as compared to the prices in year 1: Year 1: 100% of Year 1 prices Year 2: 104% of Year 1 prices Year 3: 106% of Year 1 prices Year 4: 107% of Year 1 prices Year 5: 105% of Year 1 prices what years did we have deflation, inflation disinflation?

There are deflation in year 5 only, inflation in year 2 only, and disinflation in years 3 and 4.

Explanation:

Deflation occurs when there is a fall in the general price level in an economy which is sustained over a period of time. It is also referred to as a negative inflation because it is evident when the rate of inflation falls below zero percent.

Inflation occurs when there is a rise in the general price level in an economy which is sustained over a period of time.

Disinflation occurs when there is a fall in the inflation rate.

From the question, the following can be obtained:

(1) Year 1 = 100%, no difference.

(2) Year 2 = 104% of year 1, 4% greater than Year 1, this is inflation.

(3) Year 3 = 106% of year 1, 2% greater than year 2, it is less than 4% difference between year 2 and year 1, this is disinflation.

(4) Year 4 = 107% of year 1, 1% greater than year 3, but it is less than 2% difference between year 3 and year 2, this is disinflation.

(5) Year 5 = 105% of year 1, 2% less than year 4 as 105% minus 107% is -2%, this is deflation.

Therefore, there are deflation in year 5 only, inflation in year 2 only, and disinflation in years 3 and 4.

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