A-level Economics Tutor

Inflation Theme 2

Where it is examined
A-level Paper 2 (and Paper 3); AS Paper 2
Level
AS and A level
Specification
Section 2.1, 1 statement
Since 2016
35 question parts: 8 essays, 4 levels-marked responses, 4 multiple-choice items
Key terms cards (15)Define-it drill

Specification statements

Every essay set on this topic

SeriesPaperQMarksTitle
June 2025AS Paper 26(f)20Evaluate the possible causes of inflation in the UK.
June 2025Paper 31(d)25Evaluate the microeconomic and macroeconomic effects of high levels of inflation. Refer to the UK or any other developed economy in your answer.
June 2023AS Paper 26(g)20Evaluate how interest rates are used to control UK inflation.
June 2023Paper 32(e)25Evaluate the microeconomic and macroeconomic effects of labour shortages in the UK, or a developed economy of your choice.
June 2019AS Paper 26(f)20Evaluate the use of interest rate changes as a means of controlling UK inflation.
June 2019Paper 32(e)25Evaluate the likely microeconomic and macroeconomic effects of relatively high inflation rates in many African countries.
June 2018AS Paper 26(g)20Evaluate the likely impact of high inflation on the UK government’s macroeconomic objectives.
June 2016AS Paper 26(f)20Evaluate whether the MPC has been successful in controlling the UK’s inflation rate since 2011.

Past-paper questions

Print this topic as a pack

Tap a question to zoom it. The data and extracts fold out above each question; the mark scheme and examiner's comment open underneath.
June 2025 · AS Paper 2 · Q6(f) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6Sources for use with SECTION B Read Figures 1 and 2 and Extract A before answering Question 6. UK living standards and supply‑side policies Figure 1: UK rate of economic growth, 2010 to 2028 10.0 % 7.5 5.0 2.5 0 –2.5 –5.0 –7.5 –10.0 * Data from 2023 to 2028 are forecast figures (Source: adapted from https://www.statista.com/statistics/375195/gdp-growth-forecast-uk/) Figure 2: UK inflation rate* and base interest rate, January 2022 to October 2023 12 % 10 8 6 4 2 0 inflation rate base interest rate * Measured by Consumer Prices Index (CPI). This is the year-on-year inflation rate calculated monthly. (Source: adapted from www.statista.com and www.tradingeconomics.com) Extract A Economic reforms Economists forecast that the UK will experience a slower rate of economic growth between 2024 and 2028. They also expect a high rate of inflation due to rising import prices of food, fuel and energy, and a strong demand for consumer goods. As a result, real income per household is estimated to decrease by around 0.9% in 2024. 5 This decrease would be the largest reduction in living standards since the Office for National Statistics records began in the 1950s. However, the UK government argues that there are some limitations of using GDP to compare living standards over time. One main reason is the fact that GDP figures are in nominal terms. The government questions the reliability of inflation data as it 10 believes that the Monetary Policy Committee (MPC) of the Bank of England will keep a high base interest rate to control inflation. The government also claims that the forecast by economists fails to consider the market-based supply-side policies it introduced in November 2023 to improve living standards. The government’s £10.4 billion cut to National Insurance contributions for employees 15 is the most significant policy, expected to increase employment and living standards. It is forecast to bring additional people into work and encourage more people to work longer hours. This is likely to result in an extra 94 000 full-time workers. The government has also taken measures to encourage more out-of-work benefits claimants into jobs. It introduced stricter benefit rules for people who can work but 20 do not take a job offered to them. This includes stopping people’s benefits if they do not actively engage in seeking employment in six months. This is likely to result in a further increase in employment figures. But economists claim that its impact on GDP will be relatively insignificant. This is because most of those affected by this policy will take on work with limited hours and very low pay. 25 These market-based supply-side policies, combined with measures centred on childcare subsidies for working parents, are expected to increase total employment by 200 000 between 2024 and 2028. The government argues that the expected increase highlights that it is better to “unlock the potential we have at home”, rather than encouraging migration. However, several economists suggest that 30 a rise in net migration is contributing more to an increase in the UK’s potential economic growth. Furthermore, the UK government’s decision to offer 100% tax relief on investment in capital machinery will increase overall investment by 0.5% by 2028. The benefits of 35 this effective tax cut for firms are estimated to increase over time, as technology advances and productivity improves. However, this tax cut will not prevent business investment falling in the short term, as higher interest rates are making it more expensive for firms to borrow. Economists suggest that this tax cut can only be funded by decreasing government 40 expenditure on public services in the long run. Government expenditure will need to decrease by a third, as a proportion of GDP, between 2024 and 2028. (Source: adapted from https://www.ft.com/content/5ff3538b-aed2-4898-b423- f0c61da728ff)
(f) Evaluate the possible causes of inflation in the UK. (20)
June 2025 · Paper 3 · Q1(d) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1Sources for use with SECTION A Read Figures 1 and 2 and the following Extracts A, B, C and D before answering Question 1. The cost of living in the UK Figure 1: The price per litre of unleaded petrol in the UK, in pence, 2016–2023 200 Pence per litre 180 160 140 120 100 0 2016 2017 2018 2019 2020 2021 2022 2023 (Source adapted from: RAC) Figure 2: UK inflation, as measured by CPI, and wage growth (excluding bonuses), 3-month averages, 2012–2022 10 Inflation % (9.4%) 8 6 Wage growth (4.7%) 4 2 0 –2 2012 2014 2016 2018 2020 2022 (Source adapted from: ONS) Extract A Supermarket restrictions on multibuy deals and advertising Government rules limiting the location of unhealthy foods in shops began in 2022. Less healthy products are no longer promoted in key locations, such as checkouts, store entrances, aisle ends and their online equivalents. Rules banning multibuy deals on foods and drinks high in fat, salt or sugar (HFSS) – including buy one get 5 one free (BOGOF), ‘3 for 2’, and restrictions on free refills for soft drinks – were due in October 2023. The restrictions banning HFSS adverts on TV before 9pm and paid-for adverts online were set for January 2024. (Source adapted from: https://www.gov.uk/government/news/government-delays- restrictions-on-multibuy-deals-and-advertising-on-tv-and-online) Extract B Supermarket pay in 2023 Supermarkets have been increasing their hourly pay rates and most now pay significantly more than the National Minimum Wage, which was set at £10.42 in April 2023. Tesco made its biggest ever investment in employee pay in 2023, spending 5 £230 million to finance an increase in its basic hourly rate of pay, to £11.02 per hour, rising to £11.95 in London. The pay increase is the latest boost in employment benefits as supermarkets continue to compete for in-store workers, with Sainsbury’s and Asda both increasing pay to above £11 per hour in July 2023, while Aldi pays £11.40 an hour. 10 Supermarkets have found themselves facing criticism over pay that did not rise in line with inflation. Some workers are taking industrial action, such as strikes, working closely with trade unions. (Source adapted from: https://www.grocerygazette.co.uk/2023/02/22/supermarket-pay-rate-2023/) Extract C Supermarket petrol pricing In 2023 David Potts, the boss of Morrisons, admitted that supermarkets increased profits at the petrol pumps as he was questioned in a parliamentary committee alongside executives from Tesco, Sainsbury’s and Asda who denied they were making more profit from keeping petrol prices high. 5 A Competition and Markets Authority (CMA) report indicates that supermarkets’ profits have doubled to 8% on fuel since 2017. It is expected to recommend that supermarkets must share local fuel prices on a comparison website in order to increase transparency and help bring down prices – a strategy tried successfully in Northern Ireland. All the supermarkets said they would welcome such a move. 10 In 2023, the RAC motoring group said that a price checker would be welcome but blamed high prices on the domination of petrol retailing in the UK by a few large supermarkets. “When the wholesale price of diesel fell this spring, we saw average retailer margin reach 22p a litre which was more than three times the long-term margin of 7p. This cannot be allowed to continue when households are having to 15 contend with a cost of living crisis,” an RAC spokesperson said. At the committee, one politician, Jane Hunt, said: “In 1978 there were many more supermarkets. Now there are very few…are you in fact a cartel?” (Source adapted from: https://www.theguardian.com/business/2023/jun/27/morrisons- boss-admits-supermarket-chains-have-hiked-profits-on-petrol) Extract D EU trade relations with the UK The Trade and Cooperation Agreement 2021 between the EU and the UK means that there are no tariffs or quotas on goods moving between the EU and UK, provided those goods meet the ‘rules of origin’ of a good, based on where the products or materials used in their production come from. They prevent goods 5 manufactured in outside countries being transported through the UK (or the EU) to avoid paying tariffs. To benefit from the zero tariff, businesses must show the origin of their goods. A product qualifies as ‘originating’ if it is ‘wholly obtained’ in the UK and EU or has been substantially transformed in one or both markets. That is why UK businesses 10 that re-export goods from outside countries with little or no further processing, may still face tariffs when trading with EU member states. ‘Rules of origin’ can be time consuming and complex. Some businesses cannot or do not wish to claim zero tariff because of the excessive administrative costs to firms. (Source adapted from: https://commonslibrary.parliament.uk/new-customs-rules-for-trade-with-the-eu/)
(d) Evaluate the microeconomic and macroeconomic effects of high levels of inflation. Refer to the UK or any other developed economy in your answer. (25)
June 2024 · AS Paper 2 · Q6(a) 4 marks AO1=2, AO2=2 Short answer
Data and extracts for question 6UK monetary policy since the Global Financial Crisis of 2008 Figure 1: UK inflation rate (as measured by the Consumer Prices Index) and UK nominal wage growth, annual percentage change, 2008 to 2019 5 % 4 Nominal wage growth 3 Inflation rate 2 1 0 –1 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 (Source: adapted from ONS) Figure 2: UK real GDP, annual percentage change, Q4 2006 to Q4 2019 2 % 1 0 -1 -2 -3 -4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2006 2008 2010 2012 2014 2016 2018 (Source: adapted from https://www.ons.gov.uk/economy/ grossdomesticproductgdp/timeseries/ihyq/qna) Extract A Has monetary policy worked? Between 2008 and 2009, financial markets around the world were crashing and many UK banks were adversely affected by the collapse of the housing market. This reduced access to credit for UK households and businesses. Faced with these large risks, the Monetary Policy Committee (MPC) of the Bank of 5 England reduced the base interest rate from 5.25% in February 2008 to 0.5% in March 2009. The MPC had known that reducing the base interest rate was not enough alone. It drafted the use of a new idea: quantitative easing (QE). It had bought assets worth £200 billion by November 2009. This QE was later implemented by the USA’s Federal 10 Reserve, and was claimed to be a success. In July 2012 the total spent on QE in the UK amounted to £375 billion. This decision has been credited with preventing the recession, caused by the Global Financial Crisis of 2008, turning into another Great Depression. The UK’s unemployment rate peaked at 8.5% in 2009 but had fallen to 4% in 2019, the lowest since the mid-1970s. 15 In 2016 the MPC further expanded its QE programme by £60 billion and reduced the base interest rate to 0.25%. Households with mortgages benefitted from the low interest rate, enabling them to continue consumption and therefore helping economic recovery. Nevertheless, this has resulted in a rise in household debts. Borrowing on credit cards and personal loans has increased above the levels seen before 2008. 20 Inflation caused by the fall in the exchange rate of the British pound, higher employment levels and nominal wage growth has since directed the MPC to increase base interest rates. It increased the base interest rate to 0.5% in November 2017, and then to 0.75% in March 2018. However, the uncertainty around the UK’s future trade relationship with the EU has meant that increases in the base interest rate were only marginal. 25 Many economists believe that if the UK and the EU are unable to form a trade agreement, base interest rates would need to be decreased again and QE expanded. Conversely, a few economists have argued that QE is no longer effective as a monetary policy instrument. They indicated that the base interest rate was usually reduced by as much as 5% during previous recessions. This is more than the UK can currently manage. Therefore 30 it would also require the government to implement a fiscal policy to deal with any future economic downturn. The Bank of England is, nonetheless, preparing for the worst-case scenario of a recession deeper than the downturn after the Global Financial Crisis of 2008. (Source: adapted from ‘The verdict on 10 years of quantitative easing’, Richard Partington, The Guardian, https://www.theguardian.com/business/2019/ mar/08/the-verdict-on-10-years-of-quantitative-easing)
(a) With reference to Figure 1, explain the term ‘inflation rate’. (4)
June 2024 · AS Paper 2 · Q6(d) 5 marks AO1=1, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK monetary policy since the Global Financial Crisis of 2008 Figure 1: UK inflation rate (as measured by the Consumer Prices Index) and UK nominal wage growth, annual percentage change, 2008 to 2019 5 % 4 Nominal wage growth 3 Inflation rate 2 1 0 –1 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 (Source: adapted from ONS) Figure 2: UK real GDP, annual percentage change, Q4 2006 to Q4 2019 2 % 1 0 -1 -2 -3 -4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2006 2008 2010 2012 2014 2016 2018 (Source: adapted from https://www.ons.gov.uk/economy/ grossdomesticproductgdp/timeseries/ihyq/qna) Extract A Has monetary policy worked? Between 2008 and 2009, financial markets around the world were crashing and many UK banks were adversely affected by the collapse of the housing market. This reduced access to credit for UK households and businesses. Faced with these large risks, the Monetary Policy Committee (MPC) of the Bank of 5 England reduced the base interest rate from 5.25% in February 2008 to 0.5% in March 2009. The MPC had known that reducing the base interest rate was not enough alone. It drafted the use of a new idea: quantitative easing (QE). It had bought assets worth £200 billion by November 2009. This QE was later implemented by the USA’s Federal 10 Reserve, and was claimed to be a success. In July 2012 the total spent on QE in the UK amounted to £375 billion. This decision has been credited with preventing the recession, caused by the Global Financial Crisis of 2008, turning into another Great Depression. The UK’s unemployment rate peaked at 8.5% in 2009 but had fallen to 4% in 2019, the lowest since the mid-1970s. 15 In 2016 the MPC further expanded its QE programme by £60 billion and reduced the base interest rate to 0.25%. Households with mortgages benefitted from the low interest rate, enabling them to continue consumption and therefore helping economic recovery. Nevertheless, this has resulted in a rise in household debts. Borrowing on credit cards and personal loans has increased above the levels seen before 2008. 20 Inflation caused by the fall in the exchange rate of the British pound, higher employment levels and nominal wage growth has since directed the MPC to increase base interest rates. It increased the base interest rate to 0.5% in November 2017, and then to 0.75% in March 2018. However, the uncertainty around the UK’s future trade relationship with the EU has meant that increases in the base interest rate were only marginal. 25 Many economists believe that if the UK and the EU are unable to form a trade agreement, base interest rates would need to be decreased again and QE expanded. Conversely, a few economists have argued that QE is no longer effective as a monetary policy instrument. They indicated that the base interest rate was usually reduced by as much as 5% during previous recessions. This is more than the UK can currently manage. Therefore 30 it would also require the government to implement a fiscal policy to deal with any future economic downturn. The Bank of England is, nonetheless, preparing for the worst-case scenario of a recession deeper than the downturn after the Global Financial Crisis of 2008. (Source: adapted from ‘The verdict on 10 years of quantitative easing’, Richard Partington, The Guardian, https://www.theguardian.com/business/2019/ mar/08/the-verdict-on-10-years-of-quantitative-easing)
(d) Explain one reason why ‘the fall in the exchange rate of the British pound’ (Extract A, line 21) is likely to increase inflation. (5)
June 2023 · AS Paper 2 · Q6(b) 5 marks AO1=1, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK balance of trade and inflation Figure 1: UK balance of trade in goods and services, January 2020 to October 2021 8 £ billion 6 4 2 0 -2 -4 -6 -8 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/balance-of-trade) Figure 2: UK inflation rate as measured by annual percentage changes in the Consumer Prices Index (CPI), January 2020 to October 2021 6 % 5 4.2 4 3.2 3.1 3 2.5 2.1 2.0 1.8 2 1.7 1.5 1.5 1.0 0.8 1 0.7 0.7 0.6 0.7 0.4 0.5 0.6 0.5 0.3 0.2 0 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi) Extract A Balance of trade in goods and services Rising imports from non-EU countries have increased the UK’s trade deficit in the third quarter of 2021. This was as a result of the UK strengthening its trading relationships with countries outside the EU. An 11.2% increase in imports from non-EU countries has increased the UK’s trade deficit to nearly £7 billion. 5 Moreover, exports to non-EU countries were £0.8 billion lower than exports to EU countries. Despite the overall trade balance being in deficit, the UK services trade balance is in surplus, reflecting the economy’s heavy reliance on services. The trade in 10 services surplus increased by £2.2 billion to £35.6 billion. This was mostly as a result of an increase in the export of financial services. (Source: adapted from https://www.cityam.com/swelling- non-eu-imports-widens-uk-trade-deficit) Extract B Inflation In December 2021 the rate of inflation in the UK rose to 5.4%, its highest rate in 30 years. The speed of increase has taken economists by surprise. The Bank of England expected inflation to peak at this rate, but not until April 2022. The rate was more than two-and-a-half times its 2% inflation target. 5 Transport costs were the biggest contributor to rising inflation, with petrol prices increasing by over 5%. Moreover, supply chain bottlenecks constrained access to raw materials and limited the number of new products being sold in the market. At the same time, economists warned that the demand for goods and services in the UK economy was quickly increasing. This was a result of the easing of the 10 restrictions associated with the global health crisis. The high rate of inflation would normally be enough to prompt a significant increase in the base rate of interest by the Bank of England’s Monetary Policy Committee (MPC). Despite the lower rates of economic growth, the MPC increased the base interest rate from 0.1% to 0.5% in February 2022. 15 (Source: adapted from ‘UK inflation hits highest level in a decade’, FT, https://www.ft.com/content/dd5edcd1-2e70-4910-b642- 269574b4bcdd; ‘What does the UK’s soaring inflation rate mean for you?’, The Guardian, https://www.theguardian.com/business/2021/ dec/15/what-does-uk-soaring-inflation-rate-mean)
(b) With reference to Figure 2, explain how the CPI inflation rate is measured. Refer to the concept of weights in your answer. (5)
June 2023 · AS Paper 2 · Q6(d) 6 marks AO1=2, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK balance of trade and inflation Figure 1: UK balance of trade in goods and services, January 2020 to October 2021 8 £ billion 6 4 2 0 -2 -4 -6 -8 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/balance-of-trade) Figure 2: UK inflation rate as measured by annual percentage changes in the Consumer Prices Index (CPI), January 2020 to October 2021 6 % 5 4.2 4 3.2 3.1 3 2.5 2.1 2.0 1.8 2 1.7 1.5 1.5 1.0 0.8 1 0.7 0.7 0.6 0.7 0.4 0.5 0.6 0.5 0.3 0.2 0 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi) Extract A Balance of trade in goods and services Rising imports from non-EU countries have increased the UK’s trade deficit in the third quarter of 2021. This was as a result of the UK strengthening its trading relationships with countries outside the EU. An 11.2% increase in imports from non-EU countries has increased the UK’s trade deficit to nearly £7 billion. 5 Moreover, exports to non-EU countries were £0.8 billion lower than exports to EU countries. Despite the overall trade balance being in deficit, the UK services trade balance is in surplus, reflecting the economy’s heavy reliance on services. The trade in 10 services surplus increased by £2.2 billion to £35.6 billion. This was mostly as a result of an increase in the export of financial services. (Source: adapted from https://www.cityam.com/swelling- non-eu-imports-widens-uk-trade-deficit) Extract B Inflation In December 2021 the rate of inflation in the UK rose to 5.4%, its highest rate in 30 years. The speed of increase has taken economists by surprise. The Bank of England expected inflation to peak at this rate, but not until April 2022. The rate was more than two-and-a-half times its 2% inflation target. 5 Transport costs were the biggest contributor to rising inflation, with petrol prices increasing by over 5%. Moreover, supply chain bottlenecks constrained access to raw materials and limited the number of new products being sold in the market. At the same time, economists warned that the demand for goods and services in the UK economy was quickly increasing. This was a result of the easing of the 10 restrictions associated with the global health crisis. The high rate of inflation would normally be enough to prompt a significant increase in the base rate of interest by the Bank of England’s Monetary Policy Committee (MPC). Despite the lower rates of economic growth, the MPC increased the base interest rate from 0.1% to 0.5% in February 2022. 15 (Source: adapted from ‘UK inflation hits highest level in a decade’, FT, https://www.ft.com/content/dd5edcd1-2e70-4910-b642- 269574b4bcdd; ‘What does the UK’s soaring inflation rate mean for you?’, The Guardian, https://www.theguardian.com/business/2021/ dec/15/what-does-uk-soaring-inflation-rate-mean)
(d) With reference to Extract B, explain two reasons for the increase in the rate of UK inflation. (6)
June 2023 · AS Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6UK balance of trade and inflation Figure 1: UK balance of trade in goods and services, January 2020 to October 2021 8 £ billion 6 4 2 0 -2 -4 -6 -8 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/balance-of-trade) Figure 2: UK inflation rate as measured by annual percentage changes in the Consumer Prices Index (CPI), January 2020 to October 2021 6 % 5 4.2 4 3.2 3.1 3 2.5 2.1 2.0 1.8 2 1.7 1.5 1.5 1.0 0.8 1 0.7 0.7 0.6 0.7 0.4 0.5 0.6 0.5 0.3 0.2 0 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi) Extract A Balance of trade in goods and services Rising imports from non-EU countries have increased the UK’s trade deficit in the third quarter of 2021. This was as a result of the UK strengthening its trading relationships with countries outside the EU. An 11.2% increase in imports from non-EU countries has increased the UK’s trade deficit to nearly £7 billion. 5 Moreover, exports to non-EU countries were £0.8 billion lower than exports to EU countries. Despite the overall trade balance being in deficit, the UK services trade balance is in surplus, reflecting the economy’s heavy reliance on services. The trade in 10 services surplus increased by £2.2 billion to £35.6 billion. This was mostly as a result of an increase in the export of financial services. (Source: adapted from https://www.cityam.com/swelling- non-eu-imports-widens-uk-trade-deficit) Extract B Inflation In December 2021 the rate of inflation in the UK rose to 5.4%, its highest rate in 30 years. The speed of increase has taken economists by surprise. The Bank of England expected inflation to peak at this rate, but not until April 2022. The rate was more than two-and-a-half times its 2% inflation target. 5 Transport costs were the biggest contributor to rising inflation, with petrol prices increasing by over 5%. Moreover, supply chain bottlenecks constrained access to raw materials and limited the number of new products being sold in the market. At the same time, economists warned that the demand for goods and services in the UK economy was quickly increasing. This was a result of the easing of the 10 restrictions associated with the global health crisis. The high rate of inflation would normally be enough to prompt a significant increase in the base rate of interest by the Bank of England’s Monetary Policy Committee (MPC). Despite the lower rates of economic growth, the MPC increased the base interest rate from 0.1% to 0.5% in February 2022. 15 (Source: adapted from ‘UK inflation hits highest level in a decade’, FT, https://www.ft.com/content/dd5edcd1-2e70-4910-b642- 269574b4bcdd; ‘What does the UK’s soaring inflation rate mean for you?’, The Guardian, https://www.theguardian.com/business/2021/ dec/15/what-does-uk-soaring-inflation-rate-mean)
(e) Discuss the likely economic effects of the high rate of UK inflation on consumers and workers. (15)
June 2023 · AS Paper 2 · Q6(g) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6UK balance of trade and inflation Figure 1: UK balance of trade in goods and services, January 2020 to October 2021 8 £ billion 6 4 2 0 -2 -4 -6 -8 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/balance-of-trade) Figure 2: UK inflation rate as measured by annual percentage changes in the Consumer Prices Index (CPI), January 2020 to October 2021 6 % 5 4.2 4 3.2 3.1 3 2.5 2.1 2.0 1.8 2 1.7 1.5 1.5 1.0 0.8 1 0.7 0.7 0.6 0.7 0.4 0.5 0.6 0.5 0.3 0.2 0 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi) Extract A Balance of trade in goods and services Rising imports from non-EU countries have increased the UK’s trade deficit in the third quarter of 2021. This was as a result of the UK strengthening its trading relationships with countries outside the EU. An 11.2% increase in imports from non-EU countries has increased the UK’s trade deficit to nearly £7 billion. 5 Moreover, exports to non-EU countries were £0.8 billion lower than exports to EU countries. Despite the overall trade balance being in deficit, the UK services trade balance is in surplus, reflecting the economy’s heavy reliance on services. The trade in 10 services surplus increased by £2.2 billion to £35.6 billion. This was mostly as a result of an increase in the export of financial services. (Source: adapted from https://www.cityam.com/swelling- non-eu-imports-widens-uk-trade-deficit) Extract B Inflation In December 2021 the rate of inflation in the UK rose to 5.4%, its highest rate in 30 years. The speed of increase has taken economists by surprise. The Bank of England expected inflation to peak at this rate, but not until April 2022. The rate was more than two-and-a-half times its 2% inflation target. 5 Transport costs were the biggest contributor to rising inflation, with petrol prices increasing by over 5%. Moreover, supply chain bottlenecks constrained access to raw materials and limited the number of new products being sold in the market. At the same time, economists warned that the demand for goods and services in the UK economy was quickly increasing. This was a result of the easing of the 10 restrictions associated with the global health crisis. The high rate of inflation would normally be enough to prompt a significant increase in the base rate of interest by the Bank of England’s Monetary Policy Committee (MPC). Despite the lower rates of economic growth, the MPC increased the base interest rate from 0.1% to 0.5% in February 2022. 15 (Source: adapted from ‘UK inflation hits highest level in a decade’, FT, https://www.ft.com/content/dd5edcd1-2e70-4910-b642- 269574b4bcdd; ‘What does the UK’s soaring inflation rate mean for you?’, The Guardian, https://www.theguardian.com/business/2021/ dec/15/what-does-uk-soaring-inflation-rate-mean)
(g) Evaluate how interest rates are used to control UK inflation. (20)
June 2023 · Paper 3 · Q1(b) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response
Data and extracts for question 1The UK economy Figure 1: UK gas prices in pence per therm, August 2002 to August 2022 600 500 400 Pence per 300 therm 200 100 0 Aug Aug Aug 2002 2012 2022 Figure 2: UK inflation, CPI, August 2002 to August 2022 10 9.9 8 6 (%) 4 2 0 –2 Aug Aug Aug 2002 2012 2022 Extract A Fiscal policy changes in the UK, Autumn 2022 After many changes in policy, people earning above £150 000 will now no longer benefit from the tax cut in the September 2022 mini‑budget, which proposed the removal of the 45% tax band. The proposed change in the main 20% standard rate of income tax moving to 19% has been postponed. 5 In April 2022, a 1.25% rise in national insurance contributions was implemented, labelled as a health and social care levy. It was cancelled in Autumn 2022. Britain’s poorest households would have lost £7.56 a year from the national insurance rise. The richest 10% of households, earning an average of £108 000, would have lost £1 800. Another measure in the Truss Government’s £30 billion tax cut proposals that would have 10 benefitted the rich, was the removal of the 2023 planned rise in corporation tax from 19% to 25%. The former chancellor wanted to cut the tax to 15% but this was the wrong time to do this. The former chancellor also removed the 2014 cap on bankers’ bonuses, clearly an unfair decision at the time when public sector workers were told to accept pay caps to keep inflation under control. 15 The reflationary fiscal policy triggered warnings that the Monetary Policy Committee of the Bank of England would raise interest rates further – having already raised them from 0.1% in 2021 to 2.25% in September 2022. This meant an end to the fiscal rules set by the government in the recent past: debt to be falling as a share of national income by 2024 and no borrowing for day‑to‑day spending. 20 (Source: adapted from ‘Tax cuts benefit high income earners the most’ R Merrick The Independent: 19 September 2022 and FT Source: adapted from Sebastian Payne and Chris Giles in London 29 August 2022) Extract B Inequality to rise in the UK The rising cost of living is expected to affect low‑income families the most. Inflation in Autumn 2022 is expected to hit 14% for families in the poorest tenth of the income distribution, compared with 8% for families in the richest tenth, driven in large part by rising energy costs and food prices. Around half of the food consumed in the UK is 5 imported, and the 20% fall in the value of the pound in 2022 has affected lower income groups more because food is a higher proportion of their spending. The government’s decision to freeze benefits, rather than allowing them to rise in line with current inflation, means that the support provided is a real terms cut for families currently receiving high levels of benefits. A two‑year freeze on energy price caps will now only last until April 10 2023, which would have kept the average energy bill at £2 500 rather than £3 500. (Source: adapted from IFS Report: Living standards, poverty and inequality in the UK: July 2022 and https://www.ft.com/content/6de5b52e- 64c8-4997-8939-e1c59172daa7?shareType=nongift)
(b) Examine two reasons for the rise in inflation in the UK. Refer to the information provided in your answer. (8)
June 2023 · Paper 3 · Q2(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or Hard
Data and extracts for question 2Changes in the nature of UK towns and cities Figure 3: Growing and declining high street firms – net change in store numbers, 2013–2022 Barbers Beauty salons Cafés and tearooms Nail salons Restaurants Fashion shops Estate agents Post Office services Clothes – women Banks and other financial institutions –4 000 –3 000 –2 000 –1 000 0 1 000 2 000 3 000 4 000 5 000 Net increase/decrease in store numbers (Source: adapted from https://www2.deloitte.com/uk/en/pages/consumer- business/articles/what-next-for-the-high-street.html) Figure 4: House price changes in the UK (%), 2005 to 2022 15 10 5 0 (%) –5 –10 –15 –20 2005 2010 2015 2020 2022 (Source: adapted from https://www.theguardian.com/money/2022/sep/28/ uk-house-prices-may-fall-20-amid-mortgage-carnage-warn-experts) Extract C What next for the high street? A high street is typically found in all UK towns and cities. Shops normally encountered in a typical UK high street can include successful small firms such as independent food retailers, cafés, nail and beauty salons, restaurants and charity shops. They differ from out‑of‑town shopping centres by being more diverse, family‑run and offering local or 5 personalised services. Customers are often very loyal. However, the high street may often have limited access by car or expensive parking facilities. The rise of online retailers such as Amazon and eBay have placed huge pressures on UK high streets, with many well‑known shops – and even successful retail chains – forced to close due to lost business. Many high street firms cannot compete on price with online 10 retailers who – because they frequently have very low fixed costs – can significantly undercut the high street shops on price. Even before online shopping, competition was eroding high street activity, with out‑of‑town retail parks that were not necessarily cheaper but provide a larger range of shops and offer plentiful parking. They offer a shopping experience that other retailing 15 cannot match – pleasant, safe pedestrian shopping, a clean environment, fun activities for children and spend‑the‑day‑there potential. While the list of retail and leisure failures might suggest that the high street does not have a future, some analysts argue the opposite. Many believe that the high street is ideally placed to reinvent itself in response to the structural shift in working and 20 shopping patterns that has resulted from the global health crisis 2020–22. The perceived weaknesses of the high street model – its fragmented ownership, lack of centralised coordination and high vacancy rates – become strengths as they lower the barriers to entry for new concepts and operators. They also enable risk taking and innovation that will ultimately lead to a more flourishing and diverse environment on our local high 25 streets. It should be possible for small firms to flourish even when staff shortages are pushing up wages in the high street, and house price falls damage consumer confidence and spending on perceived luxuries. (Source: adapted from https://www.designingbuildings.co.uk/ and https://www2.deloitte. com/uk/en/pages/consumer-business/articles/what-next-for-the-high-street.html) Extract D UK house prices may fall up to 20% Turmoil on the UK financial markets has prompted analysts to predict that house prices could fall dramatically, and many lenders in the mortgage sector are withdrawing deals. People coming to the end of their fixed‑rate mortgages are seeing rises from 2% to over 5.5%, with increases in the cost of borrowing of over £5 200 a year by 2024 for the 5 average mortgage in the UK. Many people think UK house prices will never fall, but analysts say the fall could be between 10% and 20%. One mortgage lender said that a lack of housing supply will not keep house prices up when mortgage interest rates are somewhere between 5% and 7%. He claimed that ‘the decade‑long property bubble is about to burst […] It’s a buyer’s market now’. The 10 greatest impact will be seen in the southeast of England. (Source: adapted from https://www.theguardian.com/money/2022/sep/28/ uk-house-prices-may-fall-20-amid-mortgage-carnage-warn-experts) Extract E UK job vacancies hit record 1.1 million as labour shortages increase The ratio of jobless people to vacancies is 1.45 to 1, lower than at any point in the last 40 years. Social care for example has 300 000 current unfilled posts. ‘Today’s figures show that labour shortages are now affecting the whole economy,’ said one analyst. ‘There are almost a million people fewer in the labour market, largely due to 5 younger people staying in education and older people dropping out of the workforce.’ The inactivity rate is 21.1%, and many people are not returning to work after the global health crisis. ‘People seeking work do not have the skills or availability that employers need,’ said Kitty Ussher, chief economist at the Institute of Directors. Firms offering higher wages does not solve the issue. 10 (Source: adapted from https://www.ft.com/content/463f4fbd- 3a50-45b5-891c-5cb5ba623df8)
(e) Evaluate the microeconomic and macroeconomic effects of labour shortages in the UK, or a developed economy of your choice. (25)
June 2022 · AS Paper 2 · Q5(a) 1 mark Multiple choice
Data and extracts for question 55 Annual rate of UK inflation, as measured by the Consumer Prices Index (CPI), January 2016 to September 2019. 3.5 % 3.0 2.5 2.0 1.5 1.0 0.5 0 January January January January 2016 2017 2018 2019 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi)
(a) Which one of the following can be deduced from the chart? (1) A The average price level was lower in January 2018 than in January 2019 B The average price level was unchanged between January 2017 and January 2019 C There was deflation from January 2018 to January 2019 D There was disinflation from January 2016 to January 2017
June 2022 · AS Paper 2 · Q5(b) 3 marks AO1=1, AO2=1, AO3=1 Short answer
Data and extracts for question 55 Annual rate of UK inflation, as measured by the Consumer Prices Index (CPI), January 2016 to September 2019. 3.5 % 3.0 2.5 2.0 1.5 1.0 0.5 0 January January January January 2016 2017 2018 2019 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi)
(b) Explain one limitation of CPI in measuring the rate of inflation. (3)
October 2020 · AS Paper 2 · Q1(a) 1 mark AO1=1 Definition
Data and extracts for question 11 In October 2019 the annual rate of inflation in the UK was 1.5%, as measured by the Consumer Prices Index (CPI), and 2.1%, as measured by the Retail Prices Index (RPI).
(a) Define the term ‘inflation’. (1)
October 2020 · AS Paper 2 · Q1(b) 2 marks AO1=2 Short answer
Data and extracts for question 11 In October 2019 the annual rate of inflation in the UK was 1.5%, as measured by the Consumer Prices Index (CPI), and 2.1%, as measured by the Retail Prices Index (RPI).
(b) Explain one likely cause of inflation. (2)
October 2020 · AS Paper 2 · Q1(c) 1 mark Multiple choice
Data and extracts for question 11 In October 2019 the annual rate of inflation in the UK was 1.5%, as measured by the Consumer Prices Index (CPI), and 2.1%, as measured by the Retail Prices Index (RPI).
(c) From the above data, it can be deduced that the percentage point difference between CPI and RPI was: (1) A 0.0 B 0.2 C 0.4 D 0.6
June 2019 · Paper 2 · Q1(b) 2 marks AO2=2 Calculation
Data and extracts for question 11 Monthly additions to UK credit card lending, £ billions, 2015 – 2017 16 000 15 500 15 000 14 500 14 000 £ billions 13 500 13 000 12 500 12 000 0 (Source: https://www.ukfinance.org.uk/statistics/cards/)
(b) Using the chart, calculate an index number for additions to credit card lending in March 2017, using January 2016 as the base. You are advised to show your working. (2)
June 2019 · Paper 2 · Q1(c) 2 marks AO1=1, AO2=1 Short answer
Data and extracts for question 11 Monthly additions to UK credit card lending, £ billions, 2015 – 2017 16 000 15 500 15 000 14 500 14 000 £ billions 13 500 13 000 12 500 12 000 0 (Source: https://www.ukfinance.org.uk/statistics/cards/)
(c) Explain one possible link between an increase in credit card lending and the rate of inflation. (2)
June 2019 · AS Paper 2 · Q4(a) 1 mark AO1=1 Definition Hard
Data and extracts for question 44 The diagram below shows the aggregate demand (AD) and a possible long-run aggregate supply (LRAS) for the UK. Price LRAS level AD 0 Real output
(a) Define the term ‘price level’. (1)
June 2019 · AS Paper 2 · Q5(b) 2 marks AO2=2 Calculation
Data and extracts for question 55 The table below shows average UK house prices between July 2014 and July 2017. Year Average house prices Index numbers of (£) average UK house prices (2014 is the base year) 2014 189 709 100 2015 200 141 2016 215 127 2017 226 185 119.2 (Source: adapted from http://landregistry.data.gov.uk/app/ukhpi/explore - Crown Copyright)
(b) Using 2014 as the base year, calculate the index number for (2) (i) 2015 (ii) 2016.
June 2019 · AS Paper 2 · Q5(c) 1 mark AO1=1 Definition
Data and extracts for question 55 The table below shows average UK house prices between July 2014 and July 2017. Year Average house prices Index numbers of (£) average UK house prices (2014 is the base year) 2014 189 709 100 2015 200 141 2016 215 127 2017 226 185 119.2 (Source: adapted from http://landregistry.data.gov.uk/app/ukhpi/explore - Crown Copyright)
(c) Define the term ‘index number’. (1)
June 2019 · AS Paper 2 · Q6(a) 4 marks AO1=2, AO2=2 Short answer
Data and extracts for question 6UK inflation and economic growth Figure 1: UK inflation rate as measured by annual percentage changes in the Consumer Price Index (CPI), January 2014 to January 2018 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 (Source: www.bankofengland.co.uk/publications/Pages/inflationreport/2017/aug.aspx) Figure 2: Selected changes to the CPI basket of goods and services, 2017 IN OUT Non-dairy milk Apple cider Jigsaw puzzles Menthol cigarettes Child scooters Child swings Cycling helmets Basic mobile phones (Source: www.theguardian.com/business/2017/mar/14/uk-inflation- ons-basket-goods-gin-cycling-helmets) Figure 3: UK exports, £ billions per month, January 2014 to January 2018 52 50 £ billions 48 46 44 42 40 0 (Source: Trading Economics, ONS - https://tradingeconomics.com/united-kingdom/exports) Figure 4: Annual percentage change in real Gross Domestic Product (GDP), 2014-2017 2014 2015 2016 2017 United Kingdom 3.1 2.2 1.8 2.0 Developing countries (average) 4.7 4.2 4.1 4.5 (Source: IMF, World Economic Outlook 2017) Extract A Rising inflation After January 2017, the inflation rate, as measured by the Consumer Price Index (CPI), in the UK has exceeded the Bank of England’s 2% target. Sharp increases in food prices as a result of the fall in the exchange rate of the pound have contributed to rising inflation. Between January and September 2017, food prices have increased by 3.5 percentage 5 points. The Office for National Statistics (ONS) has identified that the rapid increase in food prices affected people on low fixed incomes the most. It leaves them with very little money to spend on relatively more expensive items. Moreover, the Bank of England has observed a rise in the size of personal debt relative to income. In order to maintain their standard of 10 living, many consumers on low fixed incomes are using their credit cards and taking out short-term loans to fund their spending. Inflation rose to over 3% at the end of 2017 leading to the Monetary Policy Committee increasing the base rate of interest by 0.25 percentage points to 0.5% in November 2017. Wage growth has been lagging behind price rises and this is expected to continue. 15 Basic wage increases are expected to be only around 1%. This has heaped considerable pressure on households. The ONS has updated the shopping basket that is used in the measurement of UK inflation, to reflect the lifestyle of households in the country. Technological advancements, changes in consumer tastes and a move towards health, fitness and 20 gluten-free products have made it essential to revise the 2017 basket. (Source: adapted from ‘UK inflation tipped to rise again with wages forecast to stagnate’, The Guardian, https://www.theguardian.com/business/2017/aug/13/ uk-inflation-tipped-to-rise-again-with-wages-forecast-to-stagnate#img-1) Extract B Economic growth and living standards Economic growth is expected to accelerate again as foreign demand for UK exports increases due to the global economic recovery. According to some economists, consumer spending is no longer the engine of growth for the UK. The increase in exports, which is largely due to the fall in the exchange rate of the pound, is expected to be the most 5 significant driver of the UK’s economic growth. Some economists have proposed that the quality of economic growth needs to be measured and not just the quantity. This will allow governments to understand how GDP growth affects the living standards of its citizens. They want governments to publish data on the quality of life alongside GDP data as economic growth varies across the country 10 with jobs and wages distributed unevenly. Economic growth figures also hide differences that are not considered in GDP calculations. In 2017, it was estimated that the relative size of the informal economy of developing countries was nearly five times greater than that of the UK. (Source: adapted from ‘Growth to accelerate as UK economy bounces back’, The Telegraph, http://www.telegraph.co.uk /business/2017/08/01/ growth-accelerate-uk-economy-bounces-back/; ‘GDP is not enough: economists and businesses demand new measure of inclusive growth’, The Telegraph, http://www.telegraph.co.uk/business/2017/03/07/gdp-not- enough-economists-businesses-demand-new-measure-inclusive/)
(a) With reference to the first paragraph of Extract A and Figure 1, explain how the change in the exchange rate of the pound has ‘contributed to rising inflation’ (Extract A, line 4). (4)
June 2019 · AS Paper 2 · Q6(b) 6 marks AO1=2, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK inflation and economic growth Figure 1: UK inflation rate as measured by annual percentage changes in the Consumer Price Index (CPI), January 2014 to January 2018 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 (Source: www.bankofengland.co.uk/publications/Pages/inflationreport/2017/aug.aspx) Figure 2: Selected changes to the CPI basket of goods and services, 2017 IN OUT Non-dairy milk Apple cider Jigsaw puzzles Menthol cigarettes Child scooters Child swings Cycling helmets Basic mobile phones (Source: www.theguardian.com/business/2017/mar/14/uk-inflation- ons-basket-goods-gin-cycling-helmets) Figure 3: UK exports, £ billions per month, January 2014 to January 2018 52 50 £ billions 48 46 44 42 40 0 (Source: Trading Economics, ONS - https://tradingeconomics.com/united-kingdom/exports) Figure 4: Annual percentage change in real Gross Domestic Product (GDP), 2014-2017 2014 2015 2016 2017 United Kingdom 3.1 2.2 1.8 2.0 Developing countries (average) 4.7 4.2 4.1 4.5 (Source: IMF, World Economic Outlook 2017) Extract A Rising inflation After January 2017, the inflation rate, as measured by the Consumer Price Index (CPI), in the UK has exceeded the Bank of England’s 2% target. Sharp increases in food prices as a result of the fall in the exchange rate of the pound have contributed to rising inflation. Between January and September 2017, food prices have increased by 3.5 percentage 5 points. The Office for National Statistics (ONS) has identified that the rapid increase in food prices affected people on low fixed incomes the most. It leaves them with very little money to spend on relatively more expensive items. Moreover, the Bank of England has observed a rise in the size of personal debt relative to income. In order to maintain their standard of 10 living, many consumers on low fixed incomes are using their credit cards and taking out short-term loans to fund their spending. Inflation rose to over 3% at the end of 2017 leading to the Monetary Policy Committee increasing the base rate of interest by 0.25 percentage points to 0.5% in November 2017. Wage growth has been lagging behind price rises and this is expected to continue. 15 Basic wage increases are expected to be only around 1%. This has heaped considerable pressure on households. The ONS has updated the shopping basket that is used in the measurement of UK inflation, to reflect the lifestyle of households in the country. Technological advancements, changes in consumer tastes and a move towards health, fitness and 20 gluten-free products have made it essential to revise the 2017 basket. (Source: adapted from ‘UK inflation tipped to rise again with wages forecast to stagnate’, The Guardian, https://www.theguardian.com/business/2017/aug/13/ uk-inflation-tipped-to-rise-again-with-wages-forecast-to-stagnate#img-1) Extract B Economic growth and living standards Economic growth is expected to accelerate again as foreign demand for UK exports increases due to the global economic recovery. According to some economists, consumer spending is no longer the engine of growth for the UK. The increase in exports, which is largely due to the fall in the exchange rate of the pound, is expected to be the most 5 significant driver of the UK’s economic growth. Some economists have proposed that the quality of economic growth needs to be measured and not just the quantity. This will allow governments to understand how GDP growth affects the living standards of its citizens. They want governments to publish data on the quality of life alongside GDP data as economic growth varies across the country 10 with jobs and wages distributed unevenly. Economic growth figures also hide differences that are not considered in GDP calculations. In 2017, it was estimated that the relative size of the informal economy of developing countries was nearly five times greater than that of the UK. (Source: adapted from ‘Growth to accelerate as UK economy bounces back’, The Telegraph, http://www.telegraph.co.uk /business/2017/08/01/ growth-accelerate-uk-economy-bounces-back/; ‘GDP is not enough: economists and businesses demand new measure of inclusive growth’, The Telegraph, http://www.telegraph.co.uk/business/2017/03/07/gdp-not- enough-economists-businesses-demand-new-measure-inclusive/)
(b) With reference to Extract A, explain two likely economic effects of the higher rate of UK inflation. (6)
June 2019 · AS Paper 2 · Q6(c) 5 marks AO1=1, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK inflation and economic growth Figure 1: UK inflation rate as measured by annual percentage changes in the Consumer Price Index (CPI), January 2014 to January 2018 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 (Source: www.bankofengland.co.uk/publications/Pages/inflationreport/2017/aug.aspx) Figure 2: Selected changes to the CPI basket of goods and services, 2017 IN OUT Non-dairy milk Apple cider Jigsaw puzzles Menthol cigarettes Child scooters Child swings Cycling helmets Basic mobile phones (Source: www.theguardian.com/business/2017/mar/14/uk-inflation- ons-basket-goods-gin-cycling-helmets) Figure 3: UK exports, £ billions per month, January 2014 to January 2018 52 50 £ billions 48 46 44 42 40 0 (Source: Trading Economics, ONS - https://tradingeconomics.com/united-kingdom/exports) Figure 4: Annual percentage change in real Gross Domestic Product (GDP), 2014-2017 2014 2015 2016 2017 United Kingdom 3.1 2.2 1.8 2.0 Developing countries (average) 4.7 4.2 4.1 4.5 (Source: IMF, World Economic Outlook 2017) Extract A Rising inflation After January 2017, the inflation rate, as measured by the Consumer Price Index (CPI), in the UK has exceeded the Bank of England’s 2% target. Sharp increases in food prices as a result of the fall in the exchange rate of the pound have contributed to rising inflation. Between January and September 2017, food prices have increased by 3.5 percentage 5 points. The Office for National Statistics (ONS) has identified that the rapid increase in food prices affected people on low fixed incomes the most. It leaves them with very little money to spend on relatively more expensive items. Moreover, the Bank of England has observed a rise in the size of personal debt relative to income. In order to maintain their standard of 10 living, many consumers on low fixed incomes are using their credit cards and taking out short-term loans to fund their spending. Inflation rose to over 3% at the end of 2017 leading to the Monetary Policy Committee increasing the base rate of interest by 0.25 percentage points to 0.5% in November 2017. Wage growth has been lagging behind price rises and this is expected to continue. 15 Basic wage increases are expected to be only around 1%. This has heaped considerable pressure on households. The ONS has updated the shopping basket that is used in the measurement of UK inflation, to reflect the lifestyle of households in the country. Technological advancements, changes in consumer tastes and a move towards health, fitness and 20 gluten-free products have made it essential to revise the 2017 basket. (Source: adapted from ‘UK inflation tipped to rise again with wages forecast to stagnate’, The Guardian, https://www.theguardian.com/business/2017/aug/13/ uk-inflation-tipped-to-rise-again-with-wages-forecast-to-stagnate#img-1) Extract B Economic growth and living standards Economic growth is expected to accelerate again as foreign demand for UK exports increases due to the global economic recovery. According to some economists, consumer spending is no longer the engine of growth for the UK. The increase in exports, which is largely due to the fall in the exchange rate of the pound, is expected to be the most 5 significant driver of the UK’s economic growth. Some economists have proposed that the quality of economic growth needs to be measured and not just the quantity. This will allow governments to understand how GDP growth affects the living standards of its citizens. They want governments to publish data on the quality of life alongside GDP data as economic growth varies across the country 10 with jobs and wages distributed unevenly. Economic growth figures also hide differences that are not considered in GDP calculations. In 2017, it was estimated that the relative size of the informal economy of developing countries was nearly five times greater than that of the UK. (Source: adapted from ‘Growth to accelerate as UK economy bounces back’, The Telegraph, http://www.telegraph.co.uk /business/2017/08/01/ growth-accelerate-uk-economy-bounces-back/; ‘GDP is not enough: economists and businesses demand new measure of inclusive growth’, The Telegraph, http://www.telegraph.co.uk/business/2017/03/07/gdp-not- enough-economists-businesses-demand-new-measure-inclusive/)
(c) With reference to the last paragraph of Extract A and Figure 2, explain one reason why it is necessary to regularly update the CPI basket of goods and services. (5)
June 2019 · AS Paper 2 · Q6(f) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6UK inflation and economic growth Figure 1: UK inflation rate as measured by annual percentage changes in the Consumer Price Index (CPI), January 2014 to January 2018 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 (Source: www.bankofengland.co.uk/publications/Pages/inflationreport/2017/aug.aspx) Figure 2: Selected changes to the CPI basket of goods and services, 2017 IN OUT Non-dairy milk Apple cider Jigsaw puzzles Menthol cigarettes Child scooters Child swings Cycling helmets Basic mobile phones (Source: www.theguardian.com/business/2017/mar/14/uk-inflation- ons-basket-goods-gin-cycling-helmets) Figure 3: UK exports, £ billions per month, January 2014 to January 2018 52 50 £ billions 48 46 44 42 40 0 (Source: Trading Economics, ONS - https://tradingeconomics.com/united-kingdom/exports) Figure 4: Annual percentage change in real Gross Domestic Product (GDP), 2014-2017 2014 2015 2016 2017 United Kingdom 3.1 2.2 1.8 2.0 Developing countries (average) 4.7 4.2 4.1 4.5 (Source: IMF, World Economic Outlook 2017) Extract A Rising inflation After January 2017, the inflation rate, as measured by the Consumer Price Index (CPI), in the UK has exceeded the Bank of England’s 2% target. Sharp increases in food prices as a result of the fall in the exchange rate of the pound have contributed to rising inflation. Between January and September 2017, food prices have increased by 3.5 percentage 5 points. The Office for National Statistics (ONS) has identified that the rapid increase in food prices affected people on low fixed incomes the most. It leaves them with very little money to spend on relatively more expensive items. Moreover, the Bank of England has observed a rise in the size of personal debt relative to income. In order to maintain their standard of 10 living, many consumers on low fixed incomes are using their credit cards and taking out short-term loans to fund their spending. Inflation rose to over 3% at the end of 2017 leading to the Monetary Policy Committee increasing the base rate of interest by 0.25 percentage points to 0.5% in November 2017. Wage growth has been lagging behind price rises and this is expected to continue. 15 Basic wage increases are expected to be only around 1%. This has heaped considerable pressure on households. The ONS has updated the shopping basket that is used in the measurement of UK inflation, to reflect the lifestyle of households in the country. Technological advancements, changes in consumer tastes and a move towards health, fitness and 20 gluten-free products have made it essential to revise the 2017 basket. (Source: adapted from ‘UK inflation tipped to rise again with wages forecast to stagnate’, The Guardian, https://www.theguardian.com/business/2017/aug/13/ uk-inflation-tipped-to-rise-again-with-wages-forecast-to-stagnate#img-1) Extract B Economic growth and living standards Economic growth is expected to accelerate again as foreign demand for UK exports increases due to the global economic recovery. According to some economists, consumer spending is no longer the engine of growth for the UK. The increase in exports, which is largely due to the fall in the exchange rate of the pound, is expected to be the most 5 significant driver of the UK’s economic growth. Some economists have proposed that the quality of economic growth needs to be measured and not just the quantity. This will allow governments to understand how GDP growth affects the living standards of its citizens. They want governments to publish data on the quality of life alongside GDP data as economic growth varies across the country 10 with jobs and wages distributed unevenly. Economic growth figures also hide differences that are not considered in GDP calculations. In 2017, it was estimated that the relative size of the informal economy of developing countries was nearly five times greater than that of the UK. (Source: adapted from ‘Growth to accelerate as UK economy bounces back’, The Telegraph, http://www.telegraph.co.uk /business/2017/08/01/ growth-accelerate-uk-economy-bounces-back/; ‘GDP is not enough: economists and businesses demand new measure of inclusive growth’, The Telegraph, http://www.telegraph.co.uk/business/2017/03/07/gdp-not- enough-economists-businesses-demand-new-measure-inclusive/)
(f) Evaluate the use of interest rate changes as a means of controlling UK inflation. (20)
June 2019 · Paper 3 · Q2(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or Hard
Data and extracts for question 2Mozambique Figure 2: Interest rates (bank rate of the central bank) and inflation rates of selected African countries, 2017 Selected country Central bank Inflation rate rate of interest (CPI measure) Congo (D.R.) 14% 13.8% Ghana 21% 9.1% Kenya 10% 10.1% Malawi 18% 21.4% Mozambique 21.75% 18.0% Nigeria 14% 21.1% (Source: official government websites, and other news sources, July 2017) Extract D Rising debt levels in Africa Increases in national debt have brought several African governments towards a debt-servicing crisis when the repayment of debt and interest become unsustainable. Between 2010 and 2015, many sub-Saharan countries raised debt totalling more than £20 billion. Back then, with commodity prices soaring and foreign loans available at very 5 low interest rates, everyone agreed that borrowing was the way to grow an economy with expansionary fiscal policy. Since 2015, some African governments – beneficiaries of big debt write-offs at the start of the century – have taken to private debt markets too eagerly, leaving them with heavy repayment schedules at a time of lower commodity prices. 10 Until recently, the International Monetary Fund (IMF) has played down African debt concerns, pointing to better management of public resources and greater transparency. But it was shaken by Mozambique’s default on more than £2 billion of secret loans used to purchase a non-existent tuna-fishing fleet, raising fears of hidden debt in other African countries with similar levels of corruption. The median level of debt in sub-Saharan Africa 15 had risen sharply from 34% of gross domestic product in 2013 to 48% in 2017. Although that is low by international standards, analysts said debt burdens were heavier than they appeared because of most African countries’ low tax base. “The real thing to look for is debt to revenue, or debt-service as a percentage of government spending,” said John Ashbourne, Africa Economist at Capital Economics. In several countries, he said, debt 20 payments were above 20% of government revenue, with an opportunity cost in terms of government spending. (Source: adapted from African debt worries intensify as levels near tipping point by David Pilling © Financial Times 2017 https://www.ft.com/ content/939808dc-b4d8-11e7-a398-73d59db9e399) Extract E Mozambique’s economic stability is being put to the test The economy of Mozambique, which gained independence from Portugal in 1975, has continued to under-perform. Large-scale emigration, especially of skilled workers, economic dependence on South Africa, a severe drought, a prolonged civil war and political tensions have hindered the country’s development. More than half of 5 Mozambique’s 26 million people continue to live below the poverty line. GDP growth declined to 3.6% in 2016 due to fiscal tightening and a slowdown in foreign direct investment. A weak manufacturing sector employs just 3.2% of the population, and is made up of small enterprises (90%), many of which were set up with the aid of microfinance. Traditional export earnings dropped due to depressed global demand. 10 In addition a wide-scale drought seriously affected agricultural production. Foreign currency inflows have weakened – as large-scale gas projects were put on hold, and 14 external lenders suspended direct budget support, as a lesson to be learned from the tuna-fleet scandal. The state budget deficit was 10.7% of GDP in 2017. High interest rates have reduced aggregate demand, and import costs added to inflation following further 15 depreciation of Mozambique’s currency, the metical, to a new low of 100 meticals to £1. Mozambique needs urgently to improve its investment environment and confidence in its institutions. The World Economic Forum’s global competitiveness ranking placed Mozambique 136 out of 137 countries. Longer term, Mozambique’s economic prospects are promising. There has been 20 progress in talks on restoring international confidence in the government’s running of the economy, leading to a lasting and sustainable agreement between rival political groups. The development of gas fields off Mozambique’s coast discovered in 2011 is set to transform the economy, coming into production in the 2020s. A rise in coal and electricity exports should help growth to increase. But in the short term, it remains 25 uncertain whether Mozambique can deliver badly needed economic stability. (Source: adapted from http://www.africaneconomicoutlook.org/en/country-notes/ mozambiqua and https://www.chathamhouse.org/expert/comment/ mozambique-s-stability-being-put-test 6 October 2017 Dr Alex Vines OBE) Extract F Microfinance in Mozambique Microfinance in Mozambique started in the late 1980s through projects initiated by international relief organisations. The sector has expanded to include many private banks and non-government organisations (NGOs), see Figure 3. This has resulted in wider use (over 100 000 borrowers) and many new business start-ups which could not have gained 5 finance from any other source. Evidence suggests that there is unfulfilled demand for microfinance and a large potential for expansion. (Source: adapted from http://www.mftransparency.org/microfinance-pricing/mozambique/) Figure 3: The cost of microfinance loans in Mozambique, 2015 Each symbol represents loans 200% to a number of borrowers (up to 2 000) by one institution. Institution Type Private banks 150% NGO 100% Mean annual percentage rate of interest 50% 0% 40 000 0 20 000 60 000 Loan size (meticals) (Source: http://www.mftransparency.org/microfinance-pricing/mozambique/)
(e) Evaluate the likely microeconomic and macroeconomic effects of relatively high inflation rates in many African countries. (25)
June 2018 · AS Paper 2 · Q6(g) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or Hard
Data and extracts for question 6The UK economy Figure 1: Unemployment – International Labour Organisation (ILO) and the claimant count, millions, 2010-2016 3 2.5 2 Millions 1.5 1 0.5 0 2010 2011 2012 2013 2014 2015 2016 ILO Claimant count (Source: ONS Datasets, https://www.ons.gov.uk/) Figure 2: Household savings*, 2010-2015 12 % 10 8 6 4 2 0 2011 2012 2013 2014 2015 2010 * Savings as a percentage of household disposable income (Source: http://www.tradingeconomics.com/united-kingdom/personal-savings) Figure 3: UK average house prices, 2005–2016 220 200 180 160 140 0 2006 2008 2010 2012 2014 2016 (Source: http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/) Extract A Soaring house prices House prices are still rising rapidly. The average UK house price was £214 000 in June 2016, according to the Office for National Statistics (ONS). This is £24 000 more than it was at its peak in September 2007, just before the economic downturn. First-time buyers have experienced the largest rise in house prices. 5 Even the loss of consumer confidence over Britain’s vote to leave the EU did not stop house prices from rising – annual growth increased from 5.2% in July 2016 to 5.6% in August 2016. House price growth was the strongest in London, with annual average prices rising by 9.6%. However, in Wales average house prices actually fell by 0.5% during the same period. In its first post-Brexit referendum forecast, estate agency Countrywide 10 said that house prices will fall by 1% across the UK in 2017, before rising by 2% in 2018. Real household income in the UK fell by 10.4% in the years following the financial crisis. This increased the difference between real income and house prices. In 1997, a house cost little more than twice the average income. By early 2015, the average price of a house was five times the average annual income. 15 The rate of home ownership for 25 to 34-year-olds has fallen to 35.8% over the last twenty-five years as houses became less affordable. First-time buyers have to wait longer to save up for a house deposit. Conversely, home ownership has risen to 78.6% among those aged 65 to 74. (Source: adapted from ‘The state of the UK housing market in five charts’, The Telegraph, http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/; ‘UK house price growth slows as demand cools after Brexit vote’, The Guardian, https://www.theguardian.com/business/2016/sep/30/uk-house- price-growth-slows-demand-cools-brexit-vote-nationwide) Extract B UK migration trends in the year ending June 2016 Inward migration levels are among the highest ever recorded with an estimated 650 000 people moving to the UK. This is an increase of around 11 000 from the previous year. Employment remains the most common reason for long-term migration (312 000) to the UK, with around 182 000 of these coming with a definite job and 130 000 looking for 5 work. Long-term migration to the UK for study was estimated to be 163 000. In addition, 80 000 long-term migrants arrived in the UK to accompany their families. There were 41 280 refugees applying for asylum, including dependants, of which 10 547 people were granted asylum. Asylum applicants cannot usually accept offers of employment while 10 their case is being processed. (Source: adapted from ‘Migration Statistics Quarterly Report: December 2016’, ONS, https:// www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/ internationalmigration/bulletins/migrationstatisticsquarterlyreport/dec2016)
(g) Evaluate the likely impact of high inflation on the UK government’s macroeconomic objectives. (20)
June 2017 · AS Paper 2 · Q1(a) 2 marks AO2=2 Calculation
Data and extracts for question 11 UK Consumer Prices Index (the base year 2005=100) September 2013 126.8 September 2014 128.4 September 2015 128.2 (Source: http://www.ons.gov.uk/ons/publications/re-reference- tables.html?edition=tcm%3A77-323657)
(a) Calculate the percentage change in the UK Consumer Prices Index from September 2014 to September 2015. You are advised to show your working. (2)
June 2017 · AS Paper 2 · Q1(b) 1 mark AO1=1 Definition
Data and extracts for question 11 UK Consumer Prices Index (the base year 2005=100) September 2013 126.8 September 2014 128.4 September 2015 128.2 (Source: http://www.ons.gov.uk/ons/publications/re-reference- tables.html?edition=tcm%3A77-323657)
(b) Define the term ‘deflation’. (1)
June 2017 · AS Paper 2 · Q1(c) 1 mark Multiple choice
Data and extracts for question 11 UK Consumer Prices Index (the base year 2005=100) September 2013 126.8 September 2014 128.4 September 2015 128.2 (Source: http://www.ons.gov.uk/ons/publications/re-reference- tables.html?edition=tcm%3A77-323657)
(c) Which one of the following is most likely to be a cause of deflation? A fall in: (1) A oil prices B unemployment C income tax rates D interest rates
June 2017 · Paper 2 · Q3(a) 1 mark Multiple choice
Data and extracts for question 33 The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015. 6.0 5.0 4.0 Annual 3.0 percentage change 2.0 in prices 1.0 0.0 –1.0 –2.0 Year CPI Food and fuel Other goods and services (Source: http://www.ons.gov.uk/ons/dcp171780_427182.pdf)
(a) Which one of the following statements is correct about the UK’s inflation record between September 2011 and January 2013? Based on the data shown, the UK experienced: (1) A deflation B disinflation C falling average prices D falling money supply
June 2017 · Paper 2 · Q3(b) 4 marks AO1=2, AO2=1, AO3=1 Short answer
Data and extracts for question 33 The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015. 6.0 5.0 4.0 Annual 3.0 percentage change 2.0 in prices 1.0 0.0 –1.0 –2.0 Year CPI Food and fuel Other goods and services (Source: http://www.ons.gov.uk/ons/dcp171780_427182.pdf)
(b) With reference to the data provided, explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index. Refer to the concept of weights in your answer. (4)
June 2017 · Paper 2 · Q6(b) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response
Data and extracts for question 6The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) 1.00 0.95 0.90 price of 0.85 one euro in pounds 0.80 0.75 0.70 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Year (Source: https://www.ecb.europa.eu/stats/exchange/eurofxref/html/ eurofxref-graph-gbp.en.html#) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (CPI) 3.25 3 2.75 2.5 2.25 Annual 2 percentage change 1.75 in prices 1.5 1.25 1 0.75 0.5 0.25 0 2011 2012 2013 2014 2015 Year (Source: adapted from http://www.imf.org/external/pubs/ft/weo/ 2015/02/weodata/download.aspx) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated. The ECB cut its base interest rate by 0.1% to minus 0.3% in order to encourage private 5 banks to lend funds to companies and households rather than deposit them at the central bank. The central bank agreed to extend its €60 billion (£45 billion) monthly bond-buying quantitative easing (QE) programme for a further six months. The ECB’s €1.1 trillion QE scheme had originally been due to end in September 2016. “We are doing more because it works,” Mr Draghi said. Yet the ECB did not increase the 10 size of its monthly asset purchases and also disappointed those expecting that it would cut interest rates more aggressively. The euro rose almost 3% against the dollar to $1.08 after the announcement. Italian and Spanish bond yields both jumped by 0.27% to 1.62% and 1.72% respectively. The ECB’s economists reduced their inflation forecasts for the next two years. They now 15 predict consumer prices in the Eurozone rising by just 1% in 2016 and 1.6% in 2017 – still below the central bank’s ceiling of 2%. In November 2015, the inflation rate was just 0.1% and core inflation, excluding volatile items such as fuel and food, dropped to 0.9%. Mr Draghi stressed again that monetary policy alone could not restore the Eurozone to economic health. He called for looser fiscal policy among member states to support 20 aggregate demand and more rapid implementation of supply-side reforms. “In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively,” he said. (Source: http://www.independent.co.uk/news/business/news/ecb-disappoints-traders -with-weaker-than-expected-stimulus-a6759786.html, 4th December 2015)
(b) With reference to the information provided and your own knowledge, examine two factors which might explain the change in the rate of Eurozone inflation as shown in Figure 2. (8)
June 2016 · AS Paper 2 · Q6(d) 6 marks AO1=2, AO2=2, AO3=2 Short answer
Data and extracts for question 6UK incomes, inflation and monetary policy Figure 1 – UK average weekly household real income 700 680 660 640 £ 620 600 580 2006 2007 2008 2009 2010 2011 2012 2013 (Source: http://www.ons.gov.uk/ons/rel/family-spending/family-spending/ 2014-edition/rft-a44-final-2013.xls) Figure 2 – UK inflation rate as measured by percentage changes in the Consumer Price Index (CPI) 6.0 5.0 4.0 % 3.0 2.0 1.0 0.0 (Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2015/feb.aspx) Extract A Britons should not fear rise in interest rates The Monetary Policy Committee (MPC) of the Bank of England is prepared to raise interest rates “in the near future” if inflation increases, one of its senior policymakers has warned. Kristin Forbes, a member of the MPC, said a rise in borrowing costs would also be necessary should household debt reach unhealthy levels. However, she stressed that this was not yet a cause for concern. 5 With the UK’s base rate of interest at 0.5% and inflation at a record low and expected to be negative, the MPC is currently under no pressure to raise interest rates, despite Britain’s economic recovery. UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since summer 2014, and the Bank’s governor Mark Carney warned earlier this 10 month that a strong domestic economy would translate into higher UK inflation over the medium term. “The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said. Forbes said that “even the more lagged effects of the rise in the value of the pound will likely peak in the first part of this year and also gradually fade. Inflation will then most 15 likely bounce back. “Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.” (Source: adapted from http://www.theguardian.com/money/2015/feb/24/ britons-should-not-fear-rise-in-interest-rates- when-they-come-says-boe-member) Extract B Deflation is bad news The problem with deflation is that once you have it you can’t get rid of it. Central banks know what to do about inflation but they do not have the policy tools to deal with deflation when interest rates are almost as low as they can go. Just look at Japan, which had deflation in nine separate years from 1999-2012, with two additional years at zero, averaging minus 0.3%. The highest in any single year was minus 1.3% in 2013. 5 In the European Union (EU) in 2008, at the start of the financial crisis, there were fears of deflation but at that time central banks had the ability to cut interest rates by nearly 5 percentage points. Those fears may now be coming true, with the EU experiencing deflation of 0.5% in 2015. This was driven primarily by declines in energy prices, but there was also deflation 10 in non-energy industrial goods and telecommunications. The collapse in the cost of shipping goods potentially suggests something deeper is going on and may lead to a more persistent form of deflation than Mark Carney has currently claimed. (Source: adapted from http://www.independent.co.uk/news/business/comment/david-blanchflower/ david-blanchflower-deflation-is-bad-news--and-britain-is-likely-to-be-next-to-get-it-10078832.html)
(d) With reference to the data, explain two likely reasons for the UK’s falling inflation rate. (6)
June 2016 · AS Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6UK incomes, inflation and monetary policy Figure 1 – UK average weekly household real income 700 680 660 640 £ 620 600 580 2006 2007 2008 2009 2010 2011 2012 2013 (Source: http://www.ons.gov.uk/ons/rel/family-spending/family-spending/ 2014-edition/rft-a44-final-2013.xls) Figure 2 – UK inflation rate as measured by percentage changes in the Consumer Price Index (CPI) 6.0 5.0 4.0 % 3.0 2.0 1.0 0.0 (Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2015/feb.aspx) Extract A Britons should not fear rise in interest rates The Monetary Policy Committee (MPC) of the Bank of England is prepared to raise interest rates “in the near future” if inflation increases, one of its senior policymakers has warned. Kristin Forbes, a member of the MPC, said a rise in borrowing costs would also be necessary should household debt reach unhealthy levels. However, she stressed that this was not yet a cause for concern. 5 With the UK’s base rate of interest at 0.5% and inflation at a record low and expected to be negative, the MPC is currently under no pressure to raise interest rates, despite Britain’s economic recovery. UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since summer 2014, and the Bank’s governor Mark Carney warned earlier this 10 month that a strong domestic economy would translate into higher UK inflation over the medium term. “The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said. Forbes said that “even the more lagged effects of the rise in the value of the pound will likely peak in the first part of this year and also gradually fade. Inflation will then most 15 likely bounce back. “Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.” (Source: adapted from http://www.theguardian.com/money/2015/feb/24/ britons-should-not-fear-rise-in-interest-rates- when-they-come-says-boe-member) Extract B Deflation is bad news The problem with deflation is that once you have it you can’t get rid of it. Central banks know what to do about inflation but they do not have the policy tools to deal with deflation when interest rates are almost as low as they can go. Just look at Japan, which had deflation in nine separate years from 1999-2012, with two additional years at zero, averaging minus 0.3%. The highest in any single year was minus 1.3% in 2013. 5 In the European Union (EU) in 2008, at the start of the financial crisis, there were fears of deflation but at that time central banks had the ability to cut interest rates by nearly 5 percentage points. Those fears may now be coming true, with the EU experiencing deflation of 0.5% in 2015. This was driven primarily by declines in energy prices, but there was also deflation 10 in non-energy industrial goods and telecommunications. The collapse in the cost of shipping goods potentially suggests something deeper is going on and may lead to a more persistent form of deflation than Mark Carney has currently claimed. (Source: adapted from http://www.independent.co.uk/news/business/comment/david-blanchflower/ david-blanchflower-deflation-is-bad-news--and-britain-is-likely-to-be-next-to-get-it-10078832.html)
(e) With reference to Extracts A and B and your own knowledge, discuss whether the MPC should be concerned about the risk of deflation in the UK economy. (15)
June 2016 · AS Paper 2 · Q6(f) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6UK incomes, inflation and monetary policy Figure 1 – UK average weekly household real income 700 680 660 640 £ 620 600 580 2006 2007 2008 2009 2010 2011 2012 2013 (Source: http://www.ons.gov.uk/ons/rel/family-spending/family-spending/ 2014-edition/rft-a44-final-2013.xls) Figure 2 – UK inflation rate as measured by percentage changes in the Consumer Price Index (CPI) 6.0 5.0 4.0 % 3.0 2.0 1.0 0.0 (Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2015/feb.aspx) Extract A Britons should not fear rise in interest rates The Monetary Policy Committee (MPC) of the Bank of England is prepared to raise interest rates “in the near future” if inflation increases, one of its senior policymakers has warned. Kristin Forbes, a member of the MPC, said a rise in borrowing costs would also be necessary should household debt reach unhealthy levels. However, she stressed that this was not yet a cause for concern. 5 With the UK’s base rate of interest at 0.5% and inflation at a record low and expected to be negative, the MPC is currently under no pressure to raise interest rates, despite Britain’s economic recovery. UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since summer 2014, and the Bank’s governor Mark Carney warned earlier this 10 month that a strong domestic economy would translate into higher UK inflation over the medium term. “The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said. Forbes said that “even the more lagged effects of the rise in the value of the pound will likely peak in the first part of this year and also gradually fade. Inflation will then most 15 likely bounce back. “Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.” (Source: adapted from http://www.theguardian.com/money/2015/feb/24/ britons-should-not-fear-rise-in-interest-rates- when-they-come-says-boe-member) Extract B Deflation is bad news The problem with deflation is that once you have it you can’t get rid of it. Central banks know what to do about inflation but they do not have the policy tools to deal with deflation when interest rates are almost as low as they can go. Just look at Japan, which had deflation in nine separate years from 1999-2012, with two additional years at zero, averaging minus 0.3%. The highest in any single year was minus 1.3% in 2013. 5 In the European Union (EU) in 2008, at the start of the financial crisis, there were fears of deflation but at that time central banks had the ability to cut interest rates by nearly 5 percentage points. Those fears may now be coming true, with the EU experiencing deflation of 0.5% in 2015. This was driven primarily by declines in energy prices, but there was also deflation 10 in non-energy industrial goods and telecommunications. The collapse in the cost of shipping goods potentially suggests something deeper is going on and may lead to a more persistent form of deflation than Mark Carney has currently claimed. (Source: adapted from http://www.independent.co.uk/news/business/comment/david-blanchflower/ david-blanchflower-deflation-is-bad-news--and-britain-is-likely-to-be-next-to-get-it-10078832.html)
(f) Evaluate whether the MPC has been successful in controlling the UK’s inflation rate since 2011. (20)

Work with an Edexcel economics tutor

Essays stuck in Level 2, or losing the easy marks in Section A? Book a trial session with Lianne, a former Edexcel examiner.

Message us on WhatsApp About Lianne
Prefer email? Send an enquiry

If you are under 18, please include a parent's contact details. Enquiries go to enquiries@economicsaleveltutor.com and are deleted once handled. All tutoring is online.