Discuss the fact that inflation is better than deflation (25 marks)

Question 1

What are the 3 points for the question

Answer 1

1) Mild inflation is acceptable ( 2%) in an economic recession its stimulates economic growth, deflation doesn’t
2) Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling.
3) Deflation can improve our international competitiveness

Question 2

What is the evaluation for the Mild inflation acceptable in an economic recession to stimulate economic growth?

Answer 2

However due to this economic growth, this may lead to a possibility of wage price spiral leading to multiplier effect causing excessive inflation

Question 3

What is evaluation squared for Mild inflation acceptable in an economic recession to stimulate economic growth?

Answer 3

Skills or the workforce.

Question 4

What is the evaluation for the point Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling.

Answer 4

Depends on the PED of the good. If good has an inelastic Ped then consumers will be unresponsive to any changes to price.

Question 5

What is the evaluation squared for the point Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling. ?

Answer 5

The degree of elasticity depends on the availability of subsitutes, and the quality of goods among other goods.

Question 6

What does Deflation can improve our international competitiveness mean?

Answer 6

If our country has deflation and the other country has inflation, there will be a rise in exports, stimulating economic growth.

Question 7

What is evaluation for the idea that deflation can improve our international competitiveness?

Answer 7

Self correcting mechanism - because our goods are more attractive to other countries, there will be more demand leading to a shift in AD, leading to inflation.

Question 8

What is evaluation squared for the idea that deflation can improve our international competitiveness?

Answer 8

Although even though our exports are cheaper, other countries may not demand our goods much more, so the effect on deflation will still be minimal.