CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Coursebook answers
Chapter 20
Economics in context
Learners’ discussion might include:
• It is useful to consider how long it takes to earn the money to buy a product as it may give a clearer
indication of changes in people’s purchasing power than just price changes. For instance, the price of
a box of six eggs may rise from 5 bolivars to 5000 bolivars, but if wages also rise by 1000%, the same
quantity of eggs could be purchased.
• High price rises often result in long queues as people try to buy products before their prices rise even
further. People will want to buy the products as quickly as possible.
• People may leave countries that are experiencing high inflation as they may not be able to enjoy a good
quality of life. For instance, they may not be able to buy enough food.

Activities
Activity 20.1
1 Possible suggested chart showing inflation rates for China, India and Myanmar:
10
9
8
7
Inflation rate (%)

6
5
4
3
2
1
0
2014 2015 2016 2017 2018 2019

China India Myanmar

Selected countries’ inflation rates, 2014–2019

2 Learners’ own answers.

Activity 20.2
Learners’ answers might include:
1 The price level rose by the same percentage.
2 Indonesia and Thailand.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 No. Prices, on average, have risen by more in the Philippines than in Japan. The prices, however, may
have started significantly lower in the Philippines. As a result, it is possible that prices may have been
lower in the Philippines than in Japan.

Activity 20.3
1
Year Inflation rate %

2013 7.6

2014 7.1
2015 6.7

2016 5.5
2017 5.3
2018 5.6

2 2013
3 2018.

Activity 20.4
Possible suggested example:

Category Weight Price change Weighted price change

Food ( )
3 60
10 200
10% 3%

5 ( 200 )
1 40
Clothing 20% 2%

10 ( 200 )
1 20
Entertainment −5% −0.5%

5 ( 200 )
2 80
Miscellaneous 2½ 1%

All items 100 5.5%

Activity 20.5
Learners’ answers might include:
1 a Limitations: not applicable to all population groups and cannot measure changes in price from
one area of the country compared to another area of the country.
b Ways: regularly updating the weights and training staff to compare changes in quality of items
over time.
2 Learners’ own answers.

Activity 20.6
Country Change in real wages (%)
Belarus 8.6
Estonia 3.9
Russia 0.1
Serbia 7.0
Ukraine 7.5

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Activity 20.7
Learners’ answers might include:
1 Probably cost-push inflation. This is because the rise in prices was accompanied by a fall in output.
Such a decrease would be caused by lower aggregate supply. The exchange rate also fell which would
have pushed up the cost of imported raw materials and capital goods.
2 Consumers may have spent more, in the expectation that prices may rise more in the future. However,
consumers may have spent less. This is because output fell and so incomes are also likely to have fallen.
The rise in the interest rate may have reduced spending by encouraging more saving.
3 Other information to help answer Q1: for example change in unemployment and change in tax rates.
Other information: to help answer Q2: for example, what happened to the components of
aggregate demand.

Activity 20.8
Learners’ own answers.

Think like an economist

Learners’ answers might include: loss of faith in the currency leading people to resort to barter,
discouragement of investment, loss of value of savings, inflationary noise, long queues for, for example,
food and petrol, empty supermarket shelves, higher costs for firms.

Activity 20.9
Learners’ answers might include:
a Reasons:
Advances in technology: introduction of new, more efficient capital equipment and production
processes → lower costs of production → increase aggregate supply → lower price level.
Increased international competition → putting pressure on domestic firms to lower prices → encouraging
domestic firms to become more efficient → cut their costs → lower price level.
Fall in house prices → fall in wealth → fall in demand for curtains and furniture, for example → fall in
aggregate demand → lower price level.
Casual employment replacing permanent employment → reduction in job security → possibly also reduction
in income → reduction in consumer expenditure → lower aggregate demand → lower price level.
b Learners’ own answers.

Activity 20.10
Learners’ answers might include:
1 Food and energy have high weights in most countries’ CPI. A slowdown in the rise in prices of food
and energy is likely to have noticeable impact on the inflation rate.
2 If Mexico’s exchange rate fell in value, the price of imported goods and services would have increased.
It may also have reduced pressure on Mexican firms to keep their prices low.
3 Investment may have been higher in Chile between 2017 and 2019 than in Brazil and in Mexico as the
price level was more stable. This would have made it easier for firms to plan. Its inflation rate was also
lower which may have made it more price competitive. If the country’s firms captured more market
share at home and abroad, its firms are likely to have expanded their output.
4 None of the central banks was successful in meeting their inflation targets over the whole period
shown. Over the whole period, Chile’s central bank was the most successful. The inflation rate averaged
3.1%, very close to the target of 3%. Brazil’s averaged 5.9% and Mexico’s 4%. Brazil and Chile came
closer to their targets from 2017 to 2019 than from 2013 to 2016. In contrast, Mexico was closer from
2013 to 2016 than from 2017 to 2019.
5 Learners’ own answers.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions: Multiple choice

1 D Deflation will mean that each unit of money will buy more goods and services. The price level will
fall. The effect on the exchange rate and unemployment are uncertain.
2 B The group of workers will have less actual money but the amount they have will buy more goods
and services as prices have fallen by a greater percentage.
3 C Product Weight Price change (%) Weighted price change (%)

1
Clothing 20 2
10
1
Entertainment −5 −1
5
1
Food 10 5
2
1
Fuel 30 6
5
12

4 A Weights are attached to different categories of products according to what proportion people
spend on the products. For example, if people spend $25 out of $100 on housing, a weight of 1
would be attached to it. 4
5 B A depreciation of the foreign exchange rate would increase the price of imported raw materials
and imported capital goods. This would raise the costs of production. A and D might reduce cost-
push inflation as both could reduce wage costs, or at least, any rise in wage costs. C could cause
demand-pull inflation if aggregate supply does not rise in line with the higher aggregate demand.
6 A The diagram shows that inflation is falling over the period (disinflation) but the inflation rate is
still positive. This means that prices rise throughout the period, although at a lower rate. The price
level was lowest in 2020 and highest in 2023. Higher prices means the value of money continued to
fall. Its value was highest at the start of the period shown, that is, 2020.
7 D An increase in a budget deficit would mean that the amount by which government spending
exceeds tax revenue is getting greater. This injection of extra spending would increase aggregate
demand. A could reduce demand-pull inflation by decreasing spending. B might reduce cost-push
inflation as it could reduce the growth of wages. C would mean lower net exports which would
reduce aggregate demand and so may decrease demand-pull inflation.
8 B Foreign firms becoming more price competitive would put pressure on domestic firms to keep their
prices low. A high proportion of the rise in income being spent on imports would still mean that some
more is being spent on domestically-produced products and so aggregate demand would rise. If income
is redistributed from the rich to the poor, consumer expenditure is likely to rise as the poor spend a
higher proportion of their income. The newly employed being paid the same as existing workers but
being less productive would mean that costs of production would rise, causing cost-push inflation.
9 A If a country is experiencing inflation, it will be more expensive for its population to buy goods
and services. Each unit of the currency will buy less and so purchasing power will fall. The
real disposable income of exporters could fall if the country’s inflation rate is higher than rival
countries. Whether the standard of living rises or falls will depend on a number of factors
including whether money wages rise by more than the price level.
10 D The government may benefit from inflation as fiscal drag may occur. The government may gain
higher tax revenue if tax brackets are not adjusted in line with inflation. Exporters may lose
revenue if their prices rise by more than their international competitors and demand for their
products is price elastic. Lenders may be disadvantaged by inflation if the rate of interest does not
rise in line with inflation. People on fixed incomes will be able to buy less with higher prices.

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