IGCSE Economics Paper-2: Specimen Questions with Answers 1 - 1 of 100

Passage

Inflation has dire economic consequences. Inflation is regarded as a serious social and economic problem.

Question 1 (1 of 5 Based on Passage)

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Short Answer▾

Inflation is a post-employment phenomenon. Comment on the statement.

Explanation

  • Inflation is a monetary phenomenon, a group of economists, including Pigsou and Keynes, regarded inflation as a phenomenon of full employment. According to the Keynesian theory of inflation is based on the concept of full employment. According to the Keynesian perspective, rising prices in all situations cannot be termed inflation. In case of high unemployment, rises in the money supply as well as the rising prices are followed by an expansion of output and employment inflation does not occur. Sometimes due to bottlenecks, in the economy, an increase in money supply may costs prices to rise more than the expansion of output and employment. This is also called as semi inflation. Once employment level is reached, the entire increase in money supply is reflected by rising prices a case of a true inflation.
  • Inflation occurs when there is rise in demand shown through increase in monetary spending but no increase in production either due to restriction in the economy or as the economy has already reached the full employment level. So According to Keynes rising prices cannot be termed as inflation.

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