Economics

1. 1.

   Explain the difference between disinflation and deflation, including what happens to the general price level.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Focus on the direction of the price level, not just the change in the rate. Slower increases do not reverse previous increases.

   Marking points

   • Disinflation is a lower positive inflation rate; prices still rise.
   • Deflation is a falling general price level, a negative inflation rate.

   Examiner tip: A falling inflation rate need not mean falling prices.

2. 2.

   Fictional case: a fixed consumption basket costs 250 in the base year and 275 now. Calculate the current price index with base 100 and inflation since the base year.

   [2 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Compare the same basket over time to isolate price changes. The index is a level relative to base; its increase above 100 gives the percentage rise since that base, not necessarily the annual rate.

   Marking points

   • Index = (275/250) * 100 = 110.
   • Inflation = (275 - 250)/250 * 100 = 10%.

   Examiner tip: Do not report the index 110 as inflation of 110%.

3. 3.

   Fictional case: an oil-price shock raises firms' costs while output falls. Analyse the aggregate supply effect and why demand contraction has a trade-off.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The initial shock originates in supply, not excess spending. Reducing demand changes the equilibrium along the weakened supply curve, limiting prices at a further output cost.

   Marking points

   • Higher input costs shift short-run aggregate supply left.
   • With demand unchanged the price level rises and real output falls.
   • Demand contraction can moderate price pressure.
   • It can further reduce output and employment rather than repairing the supply shock.

   Examiner tip: Locate the initial shock before selecting a policy response.

4. 4.

   Fictional case: 720000 people are employed, 80000 unemployed and actively seeking work, and 200000 outside the labour force. Calculate the unemployment rate. If 20000 unemployed people stop seeking work, with employment unchanged, calculate the new rate and interpret it.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Exclude inactive people from the denominator. When jobseekers become inactive, both unemployment and the labour force shrink; the resulting lower rate can conceal discouragement.

   Marking points

   • Initial labour force = 800000; unemployment rate = 10%.
   • New unemployed = 60000 and labour force = 780000.
   • New rate = 60000/780000 * 100 = 7.69% to two decimals.
   • The decline reflects labour-force exit, not additional jobs.

   Examiner tip: Update the denominator as well as the numerator after labour-force exit.

5. 5.

   Fictional case: retail workers lose jobs as sales move online. Evaluate retraining subsidies compared with a general spending stimulus as a response.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. A structural cause suggests targeted skills and mobility support. Demand policy can complement this during a downturn, but paying for irrelevant courses or expanding spending without suitable vacancies may fail.

   Marking points

   • Indicative: the shift creates structural mismatch between skills and vacancies.
   • Relevant retraining can improve employability but takes time and requires accessible courses.
   • Stimulus helps if weak overall demand also limits jobs but may not restore obsolete roles.
   • A justified choice depends on vacancy demand, worker constraints and concurrent cyclical weakness.

   Examiner tip: Connect each intervention to the diagnosed type of unemployment.

6. 6.

   Fictional case: firms expect persistent inflation after a temporary food shortage. Evaluate whether a central bank should react to expectations even if the original shortage may soon end.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Look beyond the first price jump to whether broad wage and price plans adjust. A proportionate response may protect credibility, while aggressive tightening could overreact to a fading supply disturbance.

   Marking points

   • Indicative: expectations can feed wage and price setting beyond the original shock.
   • Credible communication or restraint can help anchor expectations.
   • Tightening cannot directly produce food and may weaken employment.
   • A justified judgement weighs persistence evidence and credibility against output costs and policy lags.

   Examiner tip: Separate a one-off price-level shock from continuing inflation.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.