Inflation Deflation 2.1.2 Mark Scheme

r EXPERT
L TUITION
Economics Questions By Topic:
Inflation & Deflation (2.1.2)

Mark Scheme
A-Level Edexcel Theme 2
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Table Of Contents
Section A .................................................. Page 1

Section B ................................................. Page 5
SECTION A
Question Answer Mark

Number
1 (a) Knowledge 1
Knowledge/understanding:
1 mark for definition, e.g.
• Increase in the average prices/general price level (1)
• Fall in purchasing power of money/currency (1) (1)

Number
1 (b) Knowledge 2
2 marks (1+1) for, e.g.
• Demand pull inflation/increase in AD (1) with reason,
e.g. due to an increase in injections/ consumption/fall
in interest rates/fall in unemployment (1)
• Cost push inflation/decrease in SRAS (1) with reason,
e.g. due to an increase in cost of raw materials and
energy (1)
• Increase in money supply (1) for e.g. due to an
increase in quantitative easing (1) (2)

Number
1 (c) The only correct answer is D
A is not correct because there is a difference in the rate of

inflation between RPI and CPI
B is not correct because this does not show the difference in

percentage points
C is not correct because this is a partial attempt to calculate the

percentage change (1)
1
Number
2 Knowledge 1
1 mark for definition, e.g.
• Price level is the average of the current prices of
goods and services in the economy (1)
• CPI or RPI (1)
NB Do not accept inflation (1)
2
Number
3(a) B
(1)

Number
3(b) Knowledge 2, Analysis 1, Application 1
Knowledge/understanding: 2 marks for identifying how

UK inflation is measured by the Consumer Prices Index
(CPI);
• Inflation rate measures change in average prices in
an economy over a year (1)
• A representative basket of goods and services used
by average households is recorded (1)
• A survey of average prices is recorded (1)
• Reference to a base year (1)
• Reference to Family/Household/Consumer
Expenditure Survey (1)
Analysis:
Items are weighted according to proportion of spending on
each product (1)
Application: 1 mark for reference to the chart, e.g. Food and

Fuel is dragging inflation downwards
For example:
A household expenditure survey (1) is completed to decide
what goes in to the basket of goods (1). This is used to
attach weights to products based on proportion of spending
(1). In January 2015 CPI inflation was 0%. (1) (4)
NB: Candidates must refer to weights for the analysis

mark.
3
Number
4(a) Application 2
(128.2 – 128.4) / 128.4 ) X 100 or correct formula (1)
= (-)0.15% Accept range (-)0.15 to (-)0.2
NB 2 marks for correct answer.
(2)

Number
4(b) Knowledge 1
Knowledge/understanding
1 mark for definition of deflation e.g.
 A decrease in the general level of prices (1)
 Negative change in average prices (1) (1)
 Negative inflation / inflation below zero (1)

Number
4(c)
A
(1)
END OF SECTION A
4
SECTION B

Number
5(a) Knowledge 2, Application 2
Identification of impact (1) with development (1), e.g.
• Imports relatively more expensive (1)
• Leading to (cost push) inflation (1)
• Exports are relatively cheaper (1)

• Leading to (demand pull) inflation (1)
Application
2 marks for two data references (1+1), e.g.
• There has been fall in the exchange rate/value of
the pound/weaker pound (1)
• UK is a net importer of food that has a relatively
inelastic demand (1)
• Food prices have increased by 3.5 percentage
points (1)
• Inflation has increased by 1 percentage point since
the start of 2017 (1)
• CPI has exceeded the 2% target (1) (4)
5
Number
5(b) Knowledge 2, Application 2, Analysis 2
Identification of two effects (1+1) for, e.g.
• Real value of personal debt falls
• MPC raises base rate of interest
• An increase in income inequality
• Worsening of the current account
• Fall in real wages/purchasing power
Application
1 mark for each data reference from Extract A or linked
application (1+1), e.g.
• Increase in size of personal debts as consumers are
using credit cards and taking out short-term loan (1)
• Base rate of interest increased by 0.25 percentage
points to 0.5% in November 2017 (1)
• Low fixed income households are left with very little
money to spend on relatively more expensive items/
spend more on food (1)
• Inflation is expected to rise by 3% (1) and wages
are only expected to increase by 1% (1) / wages
growth lower than inflation (1)
Analysis
1 mark for linked development of each effect (1+1) e.g.
• Borrowers will benefit as the real value of their loan
repayments are reduced over time (1)
• Increases the cost of borrowing / reward for saving,
hence consumption falls (1)
• People on low fixed incomes spend larger proportion
of income on necessities (1)
• Exports become less internationally competitive (1)
• Fall in real wages / purchasing power implies lower
confidence, lower consumption and lower standard
of living (1)
NB Award up to 4 marks for one effect well

developed (1kn + 1ap + 2an) (6)
6
Number
5(c) Knowledge 1, Application 2, Analysis 2
1 mark for identification, e.g.
• To ensure that inflation/cost of living/CPI basket
is accurately measured (1)
• To ensure that consumption trends/spending are
reflected (1)
• To adjust the weightings in the CPI basket (1)
Application
2 marks for 2 relevant data references (1+1), e.g.
• Inclusion of non-dairy milk (1) / jigsaw puzzles
(1) / child scooters (1) / cycling helmets (1)
• Exclusion of menthol cigarettes (1) / apple cider
(1) / child swings (1) / basic mobile phones (1)
• A move towards health, fitness and gluten-free
products (1)
Analysis
Linked development (1+1), e.g.
• Technological advancements (1) implies consumers
switch to newly developed goods and services (1)
• Consumer tastes change frequently (1) but the CPI
basket is updated annually (1)
• Consumers could have switched away (1) from
those goods and services that have increased in
price (1) (5)
7
Question Indicative content Mark
Number
6 Knowledge 4, Application 4, Analysis 6,
• Implicit or explicit identification of the various

UK’s macroeconomic objectives
• Understanding of inflation
• May reduce growth owing to costs of inflation

• Reduction in purchasing power and real incomes
• Equality e.g. effect on those who have fixed
incomes (are not protected by inflation) who are
often the poorest
• May make the national debt smaller in real terms
making it cheaper to finance and pay back
• Reduction in competitiveness of British goods
which worsens the current account of the balance
of payments deficit and reduces international
competitiveness
• Unemployment may rise through increased levels
of inefficiency and stagflation / using a Phillips
curve
• Higher inflation associated with increasing AD
may have detrimental impact on environment
• Possible beneficial effect on the environment as
economic growth slows
• Loss of both business and consumer confidence
• The self-reinforcing effect on inflation through
expectations: higher inflation as consumers get
used to higher levels of inflation, they demand
high wages to protect buying power of incomes
NB KAA can be awarded for positive impacts on

the objectives and evaluation as the negative
impacts or vice versa (14)
8
Level Mark Descriptor
0 A completely inaccurate response.
Level 1 1–3 Displays isolated or imprecise knowledge and understanding
of terms, concepts, theories and models.
Use of generic or irrelevant information or examples.
Descriptive approach which has no chains of reasoning or
links between causes and consequences.
Level 2 4–6 Displays elements of knowledge and understanding of
economic principles, concepts and theories.
Applies economic ideas and relates them to economic
problems in context, although does not focus on the broad
elements of the question.
A narrow response or superficial, two stage chains of
reasoning only.
Level 3 7–10 Demonstrates accurate knowledge and understanding of the
concepts, principles and models.
Ability to apply economic concepts and relate them directly to
the broad elements of the question with evidence integrated
into the answer.
Analysis is clear and coherent, although it may lack balance.
Chains of reasoning are developed but the answer may lack
balance.
Level 4 11–14 Demonstrates precise knowledge and understanding of the
Ability to link knowledge and understanding in context using
appropriate examples. Analysis is relevant and focused with
evidence fully and reliably integrated.
Economic ideas are carefully selected and applied
appropriately to economic issues and problems. The answer
demonstrates logical and coherent chains of reasoning.
9
Number
6 Evaluation 6
continued • Depends on the cause, (e.g. cost push or demand
pull) duration and magnitude of inflation – may
be discussed in recent context of the UK / using
AD AS diagram
• Inflation might not translate through to higher
wages and unemployment if the workforce has
little power
• If growth is low, slightly higher inflation is worth
the risk to avoid deflation or depression
• Impact depends on the relative inflation rates
• Impact of high inflation might depend on policy
response - interest rates may have to be raised
• Other factors may have a larger effect: exchange
rates or other macro objectives (ceteris paribus) (6)
• Possible beneficial effect on the environment

0 No evaluative comments.
Level 1 1–2 Identification of generic evaluative comments without
supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2 3–4 Evidence of evaluation of alternative approaches which is
unbalanced leading to unsubstantiated judgements.
Evaluative comments with supporting evidence/reference to
context and a partially developed chain of reasoning.
Level 3 5–6 Evaluative comments supported by relevant reasoning and
appropriate reference to context.
Evaluation is balanced and considers the broad elements of
the question, leading to a substantiated judgement.
10
Number
7 Knowledge 2, Application 2, Analysis 2,
Evaluation 2
Knowledge/understanding: 2 marks for identification

of two factors (1+1), e.g.
 falling oil prices
 falling commodity prices
 changing relative exchange rates
 government fiscal tightening
 low consumer or business confidence
 increase in savings
Analysis: 2 marks for linked explanation of how these

explain the fall in Eurozone inflation (1+1), e.g.
 Falling oil prices in the world economy reduce key
costs of production such as transportation,
reducing prices of many products in the economy
Application: 2 marks (1+1) for reference to the

data/candidates’ own knowledge, e.g.
 From figure 2, Eurozone inflation 0.1% in 2015
(1)
 ECB predicts Eurozone inflation to rise ‘by just 1
per cent in 2016’ (extract A) (1)
 Figure 2 shows disinflation occurring (1)
 Inflation fell from just over 3% in 2011 (1) to less
than 0.25% in 2015 (1)
Evaluation: 2 marks for evaluation (1+1 / 2)

 Inflation likely to rise in the future, with ECB
expecting 1.6% in 2017
 Oil prices are very volatile and could easily rise
rapidly due to world events such as instability in
the Middle East
 Rising GDP in the Eurozone may mean more
demand-pull inflation in the future
 Depends on extent of fiscal tightening by
government (8)
 Oil prices a significant cost of production for
businesses
11
Number
8 (a) Knowledge 2, Application 2, Analysis 2
Knowledge
Identification of two reasons (1+1)
 Falling energy prices
 Falling telecommunication prices
 Falling shipping costs
 Falling non-energy industrial goods prices
 Slowdown in world economic growth
 Slowdown in consumer spending
 Slowdown in house construction
Application
2 relevant pieces of application from Extract B (1+1),
e.g.
 inflation at 0.3% (1)
Analysis
Linked development of how reasons identified cause
falling inflation rate (1+1)
e.g.
 falling oil prices makes transport of goods
cheaper (1)
N.B. Falling inflation rate does not necessarily mean

prices are falling, so students may talk about reasons
for disinflation and/or deflation (6)
12
Number
8 (b) Knowledge 3, Application 3, Analysis 3
The MPC should be concerned because:
 Risk of deflationary spiral; hard to ‘escape’ from

such a situation
 Example of Japan
 Consumer expectations of very low/falling prices
become embedded
 Limited ability of the MPC to get the economy out of
deflation (interest rates already only 0.5%)
 Harder for MPC to react to/influence supply-side
factors such as falling oil prices
Diagrammatic analysis may also be used as part of an

answer.
NB Candidates may, alternatively, argue that the MPC

should not be concerned about deflation for KAA and
that they should for evaluation (9)



A narrow response; chains of reasoning are developed but
the answer may lack balance.

relevant and focused examples which are fully integrated.
13
Number
8 (b) Evaluation 6
continued
MPC should not be concerned because:
 Likely to be only short-term/caused by one-off

factors that will disappear from the statistics after
one year
 Caused by supply-side factors rather than
demand-side, so less of a problem for the UK
economy
 Caused by falls in just a few significant items
(e.g. oil), fall in prices not widespread across the
whole economy
 Economic growth and incomes are still rising in
the UK economy, suggesting inflation is not
affecting consumer demand
 May benefit economy as it leads to increasing AS
due to falling commodity prices, rather than
being caused by falling AD

should not be concerned about deflation for KAA and
that they should for evaluation (6)


supporting evidence/ reference to context.
No evidence of a logical chain of reasoning.

unbalanced.
context and a partially–developed chain of reasoning.
Level 3 5–6 Evaluative comments supported by relevant chain of

reasoning and appropriate reference to context.
Evaluation recognises different viewpoints and/or is critical of
the evidence.
14
Number
8 (c) Knowledge 4, Application 4, Analysis 6,
 Changing interest rates and quantitative

easing/asset purchases to influence money supply
as monetary policies
 AD/AS diagram could be used to aid effective

analysis
MPC has been successful at controlling inflation:

 According to Figure 2 highest inflation rate was
only just over 5%, good by historical standards
 Independent of government
 Regular monthly MPC meetings implies flexibility
 Willingness to use other unorthodox tools such as
QE and forward guidance to additionally control
inflation
 QE helped to avoid risk of deflation during global
economic crisis
 Powerful transmission mechanisms
 Contrast with Japan.
MPC has not been successful at controlling inflation:

 Figure 1 shows inflation has often been outside of
range of +/- 1% from the 2% target
 MPC struggles to respond to supply-side factors,
e.g. rising food/commodity prices in 2008/9 and
now falling prices in 2014
 Interest rates have stayed at 0.5% for a long
time so there is limited scope to reduce further in
response to falling inflation/risk of deflation
 Banking failure
 In the period shown, interest rates have been
0.5% but inflation has continued to fall

has not been successful for KAA and that they have
been successful for evaluation
(14)
15


A narrow response or superficial, two-stage chains of
reasoning only.

Ability to apply economic concepts and relate them directly to
the broad elements of the question with evidence integrated
into the answer.
Analysis is clear and coherent, although it may lack balance.
Chains of reasoning are developed but the answer may lack
balance.
Level 4 11–14 Demonstrates precise knowledge and understanding of the

appropriate examples. Analysis is relevant and focused with
evidence fully and reliably integrated.
16
Number
8 (c) Evaluation 6
continued
MPC has not been successful at controlling inflation:
 Figure 1 shows inflation has often been outside of
range of +/- 1% from the 2% target
 MPC struggles to respond to supply-side factors,
e.g. falling food and commodity prices in 2014
 Interest rates have stayed at 0.5% for a long
time so there is limited scope to reduce further in
response to falling inflation/risk of deflation
 Banking failure
 In the period shown, interest rates have been
0.5% but inflation has continued to fall
(6)


supporting evidence/reference to context. No evidence of a
logical chain of reasoning.

unbalanced leading to unsubstantiated judgements.
context and a partially developed chain of reasoning.
Level 3 5–6 Evaluative comments supported by relevant reasoning and

appropriate reference to context.
Evaluation is balanced and considers the broad elements of
the question, leading to a substantiated judgement.
17
Question Indicative Content Mark
Number
9 (a) (i) KAA 4 marks,
1 mark for reference to weights, e.g. reflecting

importance of goods in the basket
Up to 3 marks for the following (1 mark for each):
 Living Costs and Food Survey/Family

expenditure survey
 Price survey
 Basket of goods
 Approx. 650 goods
 Calculated on an annual basis
 Presented as an index value
(4)

Number
9 (a) (ii) KAA 8 marks:
2 marks for reference to data, e.g. UK inflation fell

from peak of approx.. 5% in 2012 to around 0%
in 2015.
1 mark for solely identifying a relevant point

1 mark for limited development of this
up to 2 further marks for clear analysis of this
point
Maximum 6/8 if no data reference.
Award 2 reasons only. Do not double award.
For example:
- Falling oil price
- Falling food prices
- Falling commodity prices
(8)
18
Number
9 (b) KAA 8
2 marks for reference to data

point
Maximum 6/8 if no data reference.
For example:
- falling consumption as consumers hold off
purchases in expectation of further falls in
price
- falling prices becomes a cycle that it is hard
for the economy to get out of
- falling revenues for firms leading to falling
profits
- improved competitiveness & reduced
current account deficit
- increase in consumers’ real income &
therefore AD
Evaluation 4 marks (2+2 or 4):

- consumption is still high
- magnitude of change in price level
- only temporary situation
- largely a suppy-side rather than demand-
side problem
(12)

Level 3 9-12 2 convincing reasons with at least one evaluative point
Level 2 5-8 2 convincing reasons with no connections, or 1 convincing
impact with some good analysis but no evaluative point; 1
or 2 less-convincing impacts with some evaluation
Level 1 1-4 Identification of relevant reasons with or without brief
evaluative keywords
19
Number
10(a) 2 marks:
• Weights are attached to reflect relative
importance of items (1) in terms of
consumer spending/income (1)
OR weights defined as a proportion of
consumer spending/income spent on
particular goods and services (2)
KAA 4 - 1 mark per point

• Price survey
• Expenditure and Food Survey
• Basket of goods / 650 goods and services
• Contents of the basket revised annually
• Use of an index
• Base year (6)
• Price changes multiplied by weightings

Number
10(b) KAA 8 marks:

point
Award 2 reasons only.
For example:
 Inflation above target
 Rapid wage growth
 Other cost-push factors
 Other demand-pull factors e.g. house
prices
 Consumer / business expectations of
future price rises
 Lack of spare capacity in the economy
 Economy growing at ‘unsustainable’ level
 Make imports cheaper by strengthening
the value of the sterling pound (attract
hot money flows) (8)
20
Number
10(c) KAA 8 marks
Up to 4 marks for identification and explanation of

each point. Award 2 points only.
1 mark for only identification of a point, 2 marks
for identification and brief explanation, further 2
marks for analysis/development of the point.
For example, it is desirable:
 Exports may increase and imports
may decrease, improving UK trade
balance and competitiveness
 May lead to higher real wages or less
erosion of fixed incomes, hence more
spending
 Could lower nominal interest rates
which may encourage borrowing
 Benefits of falling oil and commodity
prices for the economy
Evaluation 4 marks (2+2 or 4)

For example, it is not desirable:
 Expectation of falling prices in the
future discourages purchases today;
consumption and therefore AD falls
 This is a cycle that it can be very hard
for a country to get out of
 May lead to increased unemployment
 Increases real debt burden (could
relate to consumers, business, or
the government)
NB: Candidates may take reasons why a low

rate of inflation is desirable as KAA, and why
it’s not as evaluation or vice versa.
Other evaluation points include:
 Magnitude: Only 0.1% deflation
 Deflation mainly caused by cost-push
factors
Quality of written communications will be
assessed in this question based on the
candidate’s ability:
 To present an argument and conclude
on the basis of that argument
 To organise information clearly and
coherently
 To use economic vocabulary
appropriately
 To use grammar, spelling and
punctuation appropriately (12)
21
Level 3 9-12 2 convincing reasons with at least one evaluative point
Level 2 5-8 2 convincing reasons with no connections, or 1 convincing
impact with some good analysis but no evaluative point; 1
or 2 less-convincing impacts with some evaluation
Level 1 1-4 Identification of relevant reasons with or without brief
evaluative keywords
22
Number
11 KAA 8 (12)
Up to 4 marks for identification and explanation of each benefit. Award 2

benefits only.
1 mark for only an identification of a point, 2 marks for identification and
very brief explanation, further 2 marks for analysis/development of the
point
• Improved confidence among consumers and so supporting spending

• Improved confidence among firms and so improving investment
• Possibility of lower interest rates
• Benefit to people on fixed incomes
• Less enforced redistribution of income from creditors to borrowers
• Lower shoe leather costs
• Lower menu costs
• Improved international competitiveness
• Provides a more attractive environment for FDI
• Stable inflation to avoid the risks of deflation
• Problems associated with higher inflation that can be avoided
Evaluation 4 marks (1 x 4 or 2 x 2)
• Potential offsetting macro consequences e.g. higher unemployment
• Long run and short run impacts such as reducing expectations
• Relative importance of each impact
• Lack of demand-pull inflation implies economy is doing badly
• Targeting low inflation runs the risk of deflation
Quality of written communications will be assessed in this question

based on the candidate’s ability:
• To present an argument and conclude on the basis of that argument
• To organise information clearly and coherently
• To use economic vocabulary appropriately
• To use grammar, spelling and punctuation appropriately

Level 3 9-12 2 convincing benefits with at least one evaluative point
Level 2 5-8 2 convincing benefits with no connections, or 1 convincing benefit with some
good analysis but no evaluative point; 1 or 2 less-convincing benefit with some
evaluation
Level 1 1-4 Identification of relevant benefit with or without brief evaluative keywords
23
Number
12(a) KAA 8 marks (8)
Award two reasons (2 x 4 marks)

2 marks for identifying each reason and up to 2 marks
explaining each reason.
• Help reduce inequality as inflation damages those on
fixed incomes
• Other widening of income gaps
• To slow the erosion of real incomes
• Maintain international competitiveness
• Helps price signalling an the efficient functioning of a
market
• Increased confidence in government control of economy
• Avoids the dangers of hyperinflation and/or deflation at
the target is set at +2.0%
• To maintain value of savings
• To encourage long-term planning/investment by firms
• Avoid inefficiencies in the economy such as shoe leather
costs and/or menu costs
24
Number
12(b) KAA 8 marks (12)
2 factors up to 4 marks each 2 marks for the identification and
2 marks for the explanation of each factor.
Cost push inflation or increasing the cost of factors of

production
• Weakening exchange rates leading to the increased cost
of imported components
• Rising price of oil which is used by most businesses
either directly or indirectly and the UK is a net importer
• Rising price of food as the UK is a net importer of food
• Tax increases such as VAT which will generate an
increase in prices of most goods
Evaluation 4 marks (1 x 4 or 2 x 2) factors might include

• Fixed contracts limit impact of exchange rate
depreciation
• PED for imports
• Magnitude of each factor
• Likely persistence of each factor
• Importance of each factor
• Impact on different groups

Level 9-12 1 convincing cause fully explained with at least one evaluative point
3
Level 5-8 1 convincing cause fully explained with no data, or 1 convincing cause
2 with some good analysis but no evaluative point; 1 or 2 causes with
some evaluation
Level 1-4 Identification of relevant cause with or without brief evaluative
1 keywords
25
Number
13 Data reference: 2005 as $45 (1) and 2012 as $125 (1) (6)
Identification: base year (January 2005) of index = 100 OR $45 = 100 (1)
Calculation of percentage increase in price as 177.7% (accept 177 or 178) (1)
Calculation: (125/45)x100 (2) OR 177% increase + 100% (2)
Answer = 277.77 accept 277 or 278 and anything in between these two
numbers (6)
If only (125/45)x100 and the answer is wrong award 4 marks

For incorrect data reference, but correct calculation using incorrect data,
award up to 3 marks
26
Number
14(a) KAA 6 (6)
6 x 1 mark
• Definition of CPI: a measure of the average price level of goods and
services in the UK
• Price survey
• Expenditure and Food Survey
• of approximately 7,000 households
• Basket of goods
• containing approximately 650 goods and services
• Contents of the basket revised annually
• Weighted average
• Weights are attached to reflect relative importance / further
explanation of calculation (1+1)
• Use of an index
• Base year
• Data is published monthly
• Exclusion of most housing costs

Number
14(b) KAA 8 (8)
Up to 4 marks each:
• Rising import prices (2) such as oil/commodity prices (2)
• Rising import prices (2) such as food (2)
• Rising raw material/energy prices (2) increase production costs for
firms (2)
• Weakening pound (2) making imports more expensive (2)
• VAT rises (2) increasing the price of products sold (2)
• Monetary tools tend to be more focussed on AD (2) so unable to
combat cost-push inflation effectively (2)
• Low interest rate (2) stimulating consumption/investment and AD
growth (2)
• Quantitative easing (2) / stimulating consumption/investment and AD
growth (2)
• Increase in nominal wages (2) leading to higher production costs for
firms (2)
Reward use of AS/AD diagrams (maximum of 2 marks each if develop analysis)
27
Number
14(c) KAA 8 (8)
2 x 4 marks for each consequence - 2 marks for identifying consequence

and 2 marks for linking to falling inflation
• If nominal wages rise faster/gap between wage increase and inflation
less large (2) then real incomes rise / real incomes not falling as fast
(2) which may raise consumption (2)
• Greater UK competitiveness (2) and rising exports (2)
• Danger of falling into deflation if inflation rate goes below zero (2)
and hence consumption delayed (2)
• Further monetary policy stimulus (2) such as interest rate cuts OR QE
(2)
• Improved confidence that the UK can manage the economy at a low
inflation level (2) leading to increased investment / consumption (2)
• Effect on unemployment (2) supported by Phillip's curve analysis (2)
OR increased (derived) demand for labour if consumption rises (2)
• Effect on income distribution (2) as real value of savings and
borrowings eroded at a slower rate (2)
28
Number
15(a) The general price level rose less quickly / at a
decreasing rate (2)
Use of data (2) e.g. 'inflation rate fell (1) from (4)
approx. 5% in late 2008 to approx. 2% in mid-2009
(1)'

Number
15(b) Award two consequences only
Two consequences identified (2 marks each) and

explained (2 marks each)
Consequences may include:

• Greater economic confidence among
consumers (2) and thus more spending (2)
• Unexpectedly higher real wages or
unexpectedly less erosion of fixed incomes
(2) and thus more spending (2)
• Greater economic confidence among firms (2)
and thus more investment (2)
• Lower nominal interest rates (2) which will
encourage borrowing (2)
• Conversely, higher real interest rates (2) may
encourage saving (2)
• Phillips curve (2) would suggest that
unemployment would rise (2)
• Downward pressure on firms’ costs, e.g.
lower wage demands, lower input costs (2)
increasing price competitiveness (2)
• Exports may increase and imports may
decrease (2), improving the trade balance (2)
OR leading to an appreciation in the value of
the pound (2)
• Longer-term risk of deflation (2) if inflation
(8)
falls below zero should the UK head into a
recession (2)
29
Number
16(a) KAA 8 marks
Reward identification of up to 2 Factors in Extract 2 with 2 marks each (2 x 2 mark)

• VAT 15% to 17.5% in January 2010 and/or 17.5% to 20% in January 2011
• Rises in oil prices
• Effects of higher import prices resulting from the big 25% fall in sterling from
mid-2007.
• World food prices have been rising sharply, by 8% in just the past month and
31.5% in the past year
• Inflationary expectations are higher
Explanation of transmission mechanism for each factor - up to 2 marks for each

factor’s explanation (2 x 2 marks) e.g.:
• How increase in VAT affects CPI inflation (2)
• Oil as a cost of production relevant to most goods and services (2)
• cost push inflation shifting AS curve to left (2) increasing price level (2)
• diagram without explanation (AS curve and increased price level, but must be
(8)
correctly labelled) (2)
Also reward comment such as

VAT 17.5% to 20% the increase is expected to be passed through to prices fully
whereas only about half of the earlier cut and ensuing rise went through to prices (2)

Number
16(b) KAA 8 marks
2 reasons (2 x 4 marks)
• Inflation is above the MPC’s target and tolerance
• Important to stop inflationary expectations taking hold and further fuelling
inflation
• Lowering relative inflation should increase international competitiveness
• Stronger pound would reduce impact of cost push inflation
2 marks could be awarded for a diagram which develops the analysis
Evaluation 4 marks (2 x 2 marks or 1 x 4 marks)

• Greater concern about potential deflationary spiral if consumption collapses
• Most factors are temporary
• Unions not powerful enough to create wage price spiral
• Raising interest would strengthen sterling and reduce exports’ competitiveness
and further weaken AD
(12)
• Significance of gradient of curves
Quality of written communications will be assessed in this question based on the

• To use economic vocabulary appropriately
30
Level 3 9-12 2 convincing points with at least one evaluative point
Level 2 5-8 2 convincing points with no further analysis or explanation, or 1 convincing
point with some good analysis but no evaluative point; 1 or 2 less-convincing
point with some evaluation
Level 1 1-4 Identification of relevant points with or without brief evaluative keywords

Number
16(c) KAA 18 marks
Identification of 3 macroeconomic objectives 6 marks (3 x 2 marks)

• Economic Growth
• Reduction in unemployment
• Making the distribution of income more equal
• Accept reduction of the national debt or balancing the budget
• Restoration of equilibrium in the balance of payments
• Protection of the environment
• Control of inflation
Explanation of how the macroeconomic objective might be affected 12 marks (3 x 4

marks);
• May reduce growth owing to costs of inflation
• Unemployment may rise through increased inefficiency and stagflation
• Reduction in purchasing power and real incomes
• A higher rate of inflation associated with increasing AD may have a
detrimental impact on the environment
• Effect on those who have fixed incomes (not protected by inflation) who are
often the poorest
• May make the national debt smaller in real terms
• Reduction in competitiveness of British goods worsens balance of payments
deficit
• Possible beneficial effect on the environment as growth slows
• Self reinforcing effect on inflation through expectations- higher inflation as
consumers get used to higher levels of inflation they will demand higher wages
to protect buying power of their incomes
• Loss of business and consumer confidence
Evaluation 12 marks (2 x 6 marks or 3 x 4 marks);

Comments might include reference to
• Inflation currently not that high so impact on objectives not very large
• Growth already low so slightly higher inflation is worth the risk to avoid
deflation or depression
• Possible beneficial effect on the environment as growth slows
• Inflation may not translate through to higher wages and unemployment as
workforce have little union power
• Impact deepens on relative inflation rates
• National debt being made smaller may be limited by the depreciation of the
exchange rate brought on by sustained inflation
• Other factors may have a larger effect the exchange rates or other macro
objectives (ceteris paribus)
• Explanation of it being more costly to bring inflation down -interest rates may
have to be higher for longer (or QE reversed more rapidly) in order to convince
the workforce that the government’s policy to reduce inflation is credible
31
Quality of written communications will be assessed in this question based on the
• To use economic vocabulary appropriately (30)

Level 4 25-30 2 or 3 convincing effects with at least two evaluative points (an evaluation
point is worth up to a maximum of 6 marks)
Level 3 19-24 2 or 3 convincing effects with at least one evaluative point (mark cap to 18 if
no evaluation)
Level 2 7-18 2 or 3 convincing effects with no evaluative point; 1 or 2 less-convincing
effects with some evaluation
Level 1 1-6 Identification of relevant effects with or without brief evaluative keywords
32
Number
17 Definition of inflation (2 marks):
an increase in the cost of living or average/general price level, or a fall in the
purchasing power of £1
Definition of deflation (2 marks): a decrease in the cost of living or average

price level, or a rise in the purchasing power of £1.
Outlining the difference between CPI and RPI methods of measuring inflation,
such as the RPI including mortgage payments (2 marks)
Explain trend with reference to data (2 marks)

• Inflation peaked Q3 2008 (2 marks)
• CPI prices rose faster before Q3 2008 and then rose at a slower rate
thereafter (2 marks)
• RPI prices rose slowly up to Q3 2008 an then rose less quickly after that,
eventually falling reference to deflation (2 marks).
Accept comments on the differences between the CPI and RPI rates in Figure 1
in terms of
• the overall level (2 marks)
• volatility (2 marks)
Maximum 4 marks with no reference to the data

(6)
33
Number
18(a) 1 marks for explaining weights: weights are attached to reflect
relative importance (1 mark)
Other elements, up to 3 marks
Exclusion of housing costs (1 mark)

Price survey (1 mark)
Index use (1 mark)
Base year (1 mark)
Reference to data 3.2% (1 mark)
From the expenditure and food survey (1 mark) (4)
Basket of goods (1 mark).

Number
18(b) Award two reasons (2 x 4 marks)
• Inflation damages those on fixed incomes
• Other widening of income gaps
• Maintain international competitiveness
• Helps price signalling
• Increased confidence in government control of economy
• Avoids the dangers of hyperinflation
• Avoiding deflation
• To maintain value of savings
• To encourage investment
• Avoid wage/price spiral
• Avoid shoe leather costs and/or menu costs
(8)
1 mark identifying each reason, 1 mark defining each reason, up to
2 marks explaining each reason.
34
Number
19 Up to four marks available. Award reference to:
Basket of goods (1 mark) price survey (1 mark) food
and expenditure survey (or equivalent) (1 mark) index
(process of how an index is complied) (1 mark) base
year. (1 mark)
650 items (allow in range 600 to 700). (1 mark)

Further development. (1 mark) (4)

Number
20(a) A permitted range for the increase in the price levels,
measured by changes in the CPI (2 marks);
of 2% (1 mark)(+ or – 1%) (1 mark) OR as a

government-determined goal set for the MPC. (2
marks)
Reference to data (2.1%) (1 mark) (4)

Number
20(b) For each point (allow two points only for up to 5
marks each):
Identification of evidence (1 mark); with explanation

of point (2 marks); and link to price level. (2 marks)
Evidence might include:

• prospects for output growth have worsened
• disruption to global financial markets
• tight credit
• consumer spending growth has eased
• output growth has moderated. (10)
END OF SECTION B
35

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Inflation & Deflation (2.1.2)

A-Level Edexcel Theme 2

� 0207 060 4494

Section A .................................................. Page 1

Question Answer Mark

Question Answer Mark

Question Answer Mark

A is not correct because there is a difference in the rate of

B is not correct because this does not show the difference in

C is not correct because this is a partial attempt to calculate the

NB Do not accept inflation (1)

Question Answer Mark

Knowledge/understanding: 2 marks for identifying how

Application: 1 mark for reference to the chart, e.g. Food and

NB: Candidates must refer to weights for the analysis

(128.2 – 128.4) / 128.4 ) X 100 or correct formula (1)

= (-)0.15% Accept range (-)0.15 to (-)0.2

NB 2 marks for correct answer.

Question Answer Mark

Question Answer Mark

Question Answer Mark

• Exports are relatively cheaper (1)

NB Award up to 4 marks for one effect well

• Implicit or explicit identification of the various

• May reduce growth owing to costs of inflation

NB KAA can be awarded for positive impacts on

Level Mark Descriptor

Knowledge/understanding: 2 marks for identification

Analysis: 2 marks for linked explanation of how these

Application: 2 marks (1+1) for reference to the

Evaluation: 2 marks for evaluation (1+1 / 2)

N.B. Falling inflation rate does not necessarily mean

The MPC should be concerned because:

 Risk of deflationary spiral; hard to ‘escape’ from

Diagrammatic analysis may also be used as part of an

NB Candidates may, alternatively, argue that the MPC

Level Mark Descriptor

Level 1 1–3 Displays isolated or imprecise knowledge and understanding

Level 2 4–6 Displays elements of knowledge and understanding of

Level 3 7–9 Demonstrates accurate knowledge and understanding of the

 Likely to be only short-term/caused by one-off

NB Candidates may, alternatively, argue that the MPC

Level Mark Descriptor

Level 1 1–2 Identification of generic evaluative comments without

Level 2 3–4 Evidence of evaluation of alternative approaches which is

Level 3 5–6 Evaluative comments supported by relevant chain of

 Changing interest rates and quantitative

 AD/AS diagram could be used to aid effective

MPC has been successful at controlling inflation:

MPC has not been successful at controlling inflation:

NB Candidates may, alternatively, argue that the MPC

Level 1 1–3 Displays isolated or imprecise knowledge and understanding

Level 2 4–6 Displays elements of knowledge and understanding of

Level 3 7–10 Demonstrates accurate knowledge and understanding of the

Level 4 11–14 Demonstrates precise knowledge and understanding of the

Level Mark Descriptor

Level 1 1–2 Identification of generic evaluative comments without

Level 2 3–4 Evidence of evaluation of alternative approaches which is