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

Question 1 (1 of 5 Based on Passage) Show Passage ▼

Explanation

• Inflation is defined as “A state in which the value of money is falling.” Inflation is commonly understood as situation of substantial and rapid general increase in the level of prices and consequent deterioration in the value of money over period.
• Price indices are used to measure the behavior of general price. The trends of price reveal the course of inflation or deflation in the economy. According to Lerner, “a price rise which is unforeseen and uncorrected is inflationary”
• Thus, inflation is statically measured in terms of percentage increase in the price index as rate per unit of time- usually a year or a month. The common feature of inflation is a price rise, the degree of which may measure by price indices.

Question 2 (2 of 5 Based on Passage) Show Passage ▼

Explanation

Inflation is a complex phenomenon which cannot be attributed to single factor. The major causes of inflation are:

• Over expansion of money supply- Many a time a remarkable degree of correlation between the increase in money supply and the rise in the price level may be observed.
• Expansion of bank credit- Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
• Deficit financing- The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of inflationary spiral in a country.

Ordinary Monetary Factors

• High non-developmental expenditure: increase in public expenditure and specially the growth of the defense and non-developmental expenditure.
• Huge plan investment: The huge investment and its high rate of growth in every plan may lead to an excess demand in the capital good sector, so that industrial prices may rise.
• Black money: Black money encourages lavish spending, which causes excess demand and a rise in price.