Explain the factors that cause demand-pull and cost-push inflation.

Discuss the view that deflation will always be bad for an economy.

Answers may include:

• definitions of inflation, demand-pull inflation, cost-push inflation
• diagrams to show demand-pull inflation (increase in AD) and cost-push inflation (decrease in SRAS)
• explanation of demand-pull in terms of factors which increase AD, particularly at or near to full employment, and cost-push in terms of rising costs of factors of production
• examples of inflation in different countries.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of deflation
• diagram to show deflation (shift of AD to the left and/or shift of AS to the right)
• explanation of the negative effects of deflation, eg delayed consumption, investment, downward deflationary spiral, possibility of financial crisis, worse position for debtors/borrowers
• examples of deflation in different countries
• synthesis or evaluation (discuss).

Discussion may include: consideration of the possible benefits of deflation, eg increased export competitiveness, caused by increases in AS and benefits to savers. Consideration of the word “always”.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.