alevel经济试题答题思路分析——Deflation and Disinflation
Deflation is a persistent fall in the average price level in the economy.
Disinflation is a falling rate of inflation.
Consequences of Deflation
A:Falling consumption:Consumers delay purchases as they expect further price reductions.AD shrinks even more,pushing even lower the average price level.
B:Reducing investment:As demand is low,firms are forced to cut prices,to cut down costs&even to reduce their scale of production.Low business confidence will also discourage investment.
C:Rising bankruptcies:Firms’profits decline.As a result,dividends&investment
returns fall and so share prices also fall.Business insolvencies will increase.
D:Rising unemployment:Since demand is low&prices are falling,firms will lay off workers and/or reduce wages.Unemployment will rise&this will further discourage consumption.
E:vicious cycle of falling prices/falling AD e.g.“lost decade”in Japan
F:reduced effectiveness of monetary&fiscal policyas interest rates cannot fall below zero&households prefer to save/postpone spending
G:banking system at risk as loans are not repaid
H:negative multiplier effect
I:government debt expands in real terms
(b)Discuss whether a period of inflation or a period of deflation is more economically desirable.
1)答题思路：题目分成三部分答写：先写inflation与deflation的定义；再分别写inflation与deflation的consequence；最后写自己的观点觉得哪个是more economically desirable并写原因。
•For knowledge and understanding of‘inflation’and‘deflation’.2 marks
•For an analysis of the effects of inflation and deflation.Up to 8 marks
(Only inflation or deflation considered 6 max)
•For an evaluative comment on the relative desirability of inflation and deflation.2 marks
Inflation is a sustained rise in the general price level.Deflation is a sustained fall in the general price level or a reduction in aggregate economic activity.Inflation has effects on international competitiveness,shoe leather and menu costs,the distribution of income,the ability to plan and the level of confidence.Deflation is linked to rising unemployment,falling economic growth,lower living standards,changing international competitiveness,changing distribution of income(differently to inflation)and loss of confidence.There is some overlap between the effects,and the effects may depend upon the rate of change.Mild inflation is often thought to be desirable.Governments may favour inflation as it reduces the real value of debt and increase income though higher tax revenue.The desirability will depend on the standpoint adopted.