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

Passage

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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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 1970s. This was termed as stagflation. It is the combination of

  • High inflation
  • High unemployment
  • Sluggish economic growth

Question 30 (4 of 5 Based on Passage)

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What do you mean by inflation?

Explanation

  • Inflation is defined as the rise in the prices of goods and services of day to day use, like food, clothing, housing etc.
  • Inflation is the increase in the prices of goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Average Price change in various commodities and services are measured through inflation overtime. The opposite of inflation is known as deflation which refers to the fall in the price index of this basket of items. Inflation indicates the fall in the purchasing power of a person i.e.. fall in the unit of a country՚s currency. Inflation is measured in percentages. Central government authority measures inflation and oversees adopting measures to make sure the smooth functioning of the economy.

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