IGCSE Economics Paper-2: Specimen Questions with Answers 29 - 30 of 100

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In developing countries, inflation is not purely a monetary phenomenon. Factors typically related to fiscal imbalances, driving higher money growth and exchange rate depreciation, dominate the inflation process in developing countries.

Question 29 (3 of 5 Based on Passage)

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How is inflation measured?

Explanation

For measuring inflation in a country such as U. S. , one must observe prices across the country. The change in prices seen in the local store is a very little contribution of what goes into the overall inflation in the economy. That is why sometimes people feel a disconnect between the actual prices and the inflation numbers in the economy.

  • The consumer price index (CPI) is the most used indicator of inflation, it measures the percentage change in the price of goods and services purchased or consumed by households of the members.
  • Like in Australia, the CPI is measured by the Australian Bureau of Statistics (ABS) and it is published once in a quarter. To calculate the CPI, the Australian Bureau of Statistics records the prices for different items, which are clubbed into various categories (or expenditure classes) . In every quarter, the price changes of each item are recorded in comparison with the previous quarter and the aggregate value is considered for the whole CPI basket of goods and services.

Question 30 (4 of 5 Based on Passage)

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What happens when unemployment and inflation are positively correlated?

Explanation

The positive correlation between inflation and unemployment has its own set of challenges faced by the fiscal policymakers. Policies that aim at boosting economic growth and bringing down the level of unemployment tend to exacerbate rate of inflation.

  • According to economic theory, as the rate of unemployment falls, the rate of inflation rises. This concept is explained in what is known as “the Phillips Curve.”
  • This positive relationship has broken down to the concept known as stagflation. When both inflation and unemployment rise is termed as stagflation.

Example in the United States when inflation and unemployment were positively correlated was the 1970՚s. This was termed as stagflation. It is the combination of

  • High inflation
  • High unemployment
  • Sluggish economic growth

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