CIE IGCSE Topical Past Paper 2
4.8 Inflation and deflation
0455/22/M/J/24
South America is a large geographical area with millions of microeconomic decision-makers. During a recent pandemic, schools stayed closed for longer than anywhere else in the world. As a result, students received less education. The World Bank estimated that the average student would earn $24,000 less over their lifetime. Some students may earn only the minimum wage. In 2020, South America had an inflation rate of 6.3% and an economic growth rate of only 1.8%.
d) Discuss whether or not an economy with a high inflation rate will have a low economic growth rate. [8]
0455/22/O/N/23
Botswana uses both capital goods and labour in its diamond mining industry. The country had an average economic growth rate of 3.8% between 2015 and 2019 compared to a global average of 2.8%. Over this period, the country experienced a low inflation rate and a move away from protectionism and towards free international trade.
b) Explain two reasons why a low inflation rate may increase a country’s economic growth rate. [4]
0455/21/M/J/23
Germany’s death rate is higher than some other countries, including Sweden, Cuba and the Maldives. Germany’s labour force increased in size between 2011 and 2021 and has become even more productive. The country has also experienced low inflation and a growing surplus on the current account of its balance of payments.
d) Discuss why some countries may experience lower inflation in the future and some may not. [8]
0455/21/O/N/22
Jordan has a fixed foreign exchange rate with the US dollar. The monetary policy of Jordan, therefore, follows the monetary policy of the US very closely. Due to low confidence in the global economy in 2019, central banks around the world, including Jordan and the US, cut interest rates to stimulate growth. However, this may have conflicted with the macroeconomic aim of low inflation.
a) Define inflation. [2]
0455/23/M/J/21
Latvia is one of the fastest growing economies in Europe. Although its GDP per head is below the European average, it is quickly catching up. Living standards are improving. At the same time, a decrease in borrowing has reduced the chance of high inflation. The job market is also improving as the unemployment rate is falling. However, there are concerns that there might be less balance of payments stability.
b) Explain how a decrease in borrowing could reduce the chance of high inflation. [4]
0455/22/M/J/21
Consumers in Uruguay are eating more processed foods. Factors of production, including enterprise, have responded to this change. Firms in the processed food industry have become more capital-intensive. All of Uruguay’s industries were affected by the rise in its inflation rate, from 6.2% in 2017 to 7.7% in 2018.
d) Discuss whether inflation harms a country’s industries. [8]
0455/21/M/J/21
Australia experienced a drought in 2018 which caused its agricultural output to fall. Australia’s secondary and tertiary sectors performed better in 2018 than its primary sector. All three sectors were affected by the measures taken by the central bank to avoid deflation. Some firms benefited from these measures and increased their output.
c) Analyse how a central bank could avoid deflation. [6]
0455/21/M/J/21
In 2018, the US had its lowest unemployment rate for 18 years. Cyclical unemployment was very low and so was the rate of inflation. The US also experienced a rise in labour productivity. However, it did not do so well in reducing poverty. In 2018, approximately 12% of Americans were living in poverty.
c) Analyse the advantages of a low rate of inflation. [6]
0455/23/O/N/20
It was announced in November 2016 that 500 and 1000 rupee banknotes could no longer be used in shops in India. These were replaced by the central bank, an institution that makes extensive use of division of labour. In India, cash is still an important form of money used in economic transactions. The replacement of banknotes put pressure on banking staff and other workers in the tertiary sector, and affected the general price level.
d) Discuss whether or not deflation will benefit an economy. [8]
0455/21/O/N/20
The election of a new president in South Africa in 2018 led to improvement in business and consumer confidence. Inflation rates fell despite a rise in total demand. One government policy measure established areas known as economic zones where firms pay lower, or no, taxes. These zones encourage domestic firms to become internationally competitive which could reduce the deficit on the current account of South Africa’s balance of payment.
b) Explain why inflation may fall even if there is an increase in total demand. [4]
0455/21/M/J/20
Japan has a low immigration rate and a declining population. In recent years, it has experienced deflation and a rise in child poverty. By 2017, one in six Japanese children lived in a household with less than half of the average household income. Japan operates a national minimum wage which increased every year between 2010 and 2017. This may have affected the level of poverty in the country.
b) Explain two consequences of deflation. [4]
0455/22/F/M/19
The economic problem results in people having to make choices. In Bulgaria, in recent years, people have changed how much they spend. The Bulgarian government is encouraging people to spend more. It is trying to ensure that deflation does not return and that the country will continue to experience an increase in output.
c) Analyse why deflation may cause a fall in output. [6]
d) Discuss whether or not a country will suffer if its output falls. [8]
0455/21/O/N/18
The largest airline in Pakistan was originally formed as a result of a merger between a stateowned airline and a private airline. In April 2016, the Pakistan government made this merged firm a public limited company. This was hoped to improve the productivity of this loss-making airline and also improve the overall economy of Pakistan.
c) Analyse how increased productivity could reduce inflation. [6]
0455/23/M/J/18
In early 2016, the central bank of the Republic of Turkey cut interest rates five times. This was despite an inflation rate of 7.6%. The economy had a combination of a low saving rate and weak investment. To stimulate economic growth the Turkish government announced a package of reforms including subsidies for research and investment.
b) Explain how the Consumer Prices Index (CPI) is calculated. [4]
0455/22/M/J/18
In February 2016, share prices on stock exchanges fell throughout the world. There were a number of reasons for this; including concerns about the slowdown in world growth, the possibility of deflation and unemployment, and fears that some commercial banks could go out of business.
c) Analyse what can cause deflation. [6]
d) Discuss whether or not government policy measures to reduce unemployment will cause inflation. [8]
0455/21/M/J/18
The government of Slovenia has introduced a range of supply-side policy measures to influence the country’s inflation rate. Among other factors affecting the economy is a change in trade union membership and strength.
a) Identify two price indices. [2]
c) Analyse why a government may want to reduce its country’s inflation rate. [6]
0455/22/F/M/18
In March 2016, the Canadian government announced increases in government spending including an increased subsidy to environmentally friendly technology. It also announced that high income earners would face an increase from 29% to 33% in the highest rate of income tax. Changes in government spending and taxation can influence a country’s inflation rate.
b) Explain two disadvantages of inflation. [4]
c) Analyse how an increase in government spending may cause inflation. [6]