IGCSE Economics Paper-2: Specimen Questions with Answers 31 - 32 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 31 (5 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.

Passage

In the recession that began in late 2,007 in the United States, the first main element of GDP that faltered was the part of investment called residential structures. When housing prices started falling in 2,006, new home construction slowed down. In 2,008, this sector had shrunk by more than 40% from where it had been just a few years earlier.

Question 32 (1 of 5 Based on Passage)

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Discuss the factors that cause Recession

Explanation

  • Recession is majorly caused by the fall in the value of real GDP or fall in the aggregate demand.

A demand-side recession occurs due to various factors, like:

  • A financial crisis. Banks reduce lending and investment during the time of shortage in liquidity.
  • An increase in rate of interest– It will increase the cost of borrowing and will reduce the demand.
  • Decline in asset prices – negative income effect will lead to less spending in the economy.
  • Decline in real wages – e. g. inflation outstripping nominal wage increases.
  • Decline in consumers’ confidence. Also affected by the negative multiplier effect.
  • Increase in rate of exchange– exports will become less competitive.
  • Trade war – Global economic downturn.
  • Supply-side shock, it will lead rise in oil prices and others and will cause inflation and lower spending power.

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