Volume 40, Number 2, November 2022

Answers

Exam-style questions
Questions on inflation
Steve Stoddard

This resource provides answers to the questions posed in the Exam-Style Questions column,
in the November 2022 issue of ECONOMIC REVIEW.

Question 1
Using the data in Table 1, calculate the rate of inflation in the UK between April 2013 and April
2022. Give your answer to one decimal place. (2 marks)

Answer
(120.0 – 98.3) / 98.3 x 100 = 22.1% (1dp)

Question 2
Explain how the data in Table 1 may show that living standards in the UK have fallen between
2013 and 2022. (4 marks)

Answer
Relevant points include:
• Living standards include measures of material and non-material wellbeing.
• Ability to purchase goods and services would be included in material living standards.
• In several years, inflation outpaced nominal average earnings growth, which would reduce the
spending power of the average worker, e.g. CPI inflation rose by 1.8% to April 2014 whereas
nominal average earnings only grew by 0.6%, therefore real earnings fell.
• Nominal average earnings fell in one year (2020), while CPI increased.
• There are some exceptions, e.g. the CPI fell in 2015 while nominal average earnings rose.

Hodder & Stoughton © 2022 www.hoddereducation.co.uk/economicreview

Question 3
With the help of a diagram, explain one possible cause of inflation. (9 marks)

Answer
Possible causes:
• Demand-pull, e.g. reduced interest rates, increased government spending.
• Cost-push, e.g. increased wage costs, increased raw material costs, increased energy costs.
• Use of relevant diagram, e.g. AD increase or AS decrease.

Question 4
Evaluate the view that achieving a target of low inflation is the most important macroeconomic
objective. (25 marks)

Answer
Issues for consideration:
• Understanding of low inflation
• Nature of inflation targeting and monetary policy framework
• Benefits of low inflation, e.g. increased international competitiveness
• Problems of high inflation, e.g. reduced certainty/confidence of economic agents
Issues for evaluation:
• Scope for trade-offs/conflicts, e.g. high unemployment (short-run Phillips Curve relationship)
associated with low inflation
• High inflation may undermine living standards
• Low inflation helps to achieve other macroeconomic objectives as it is associated with
macroeconomic stability
• If inflation is too low it may signal an under-heated economy
• Inflation needs to be low and stable — 'creeping inflation oils the wheels of industry'

• Difficulties in achieving an inflation target, especially if inflation caused by external factors

Hodder & Stoughton © 2022 www.hoddereducation.co.uk/economicreview