Explain why a high rate of inflation may negatively affect both a country’s export competitiveness and the level of capital investment by firms.

Discuss the view that the use of monetary policy is always the best way to reduce inflation.

Answers may include:

• definitions of inflation, export competitiveness and investment
• diagram to show the impact of inflation on the price level and output eg AD/AS
• explanation of why inflation might produce adverse effects
• example(s) of where inflation has affected a country’s export competitiveness and/or the level of capital investment.

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

Answers may include:

• definition of monetary policy
• diagram(s) to show the application of policy to deal with inflation, AD/AS
• explanation of the way in which policy impacts the rate of inflation
• examples of where such policy has been used
• synthesis or evaluation (discuss).

Discussion may include: the impacts of monetary policy on the economy, trade, employment, households, savings, investment, confidence, etc. It may also consider the merits of monetary policy in comparison with alternative policies to control inflation. It may consider the merits of policy options in relation to cost-push versus demand-pull inflation.

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