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WalesEconomicsQuick questions
Evaluating Economic Models and Policies (A2 Unit 4)
Quick questions on Inflation and deflation - WJEC A-Level Economics
3short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is deflation?Show answer
Malign deflation is dangerous. Falling prices lead consumers to delay purchases (expecting still-lower prices), cutting demand; the real value of debt rises (debt deflation), squeezing borrowers; real wages and real interest rates rise, raising costs and discouraging borrowing; and a self-reinforcing deflationary spiral can deepen a recession, as happened in Japan's "lost decades". Benign deflation, by contrast, occurs when prices fall because supply has risen through productivity gains and technological progress, which can reflect a healthy, more efficient economy. So deflation is not always harmful: demand-side deflation is dangerous, but supply-side deflation can be benign, a distinction central to the evaluation.
What is q1?Show answer
Define cost-push inflation. [2 marks]
What is q2?Show answer
Explain one reason why deflation can be harmful. [3 marks]
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