Paper 2 Autumn Mock

Question 1

Define disinflation

Answer 1

Disinflation is the falling rate of inflation. This is when average price level is still rising, but at a slower rate

This means that goods and services are relatively cheaper than they were a year ago and the purchasing power of money has increased

Question 2

In the UK, what is used to measure the rate of inflation?

Answer 2

Consumer Price Index (CPI)

Question 3

Explain the UK measuring rate of inflation

Answer 3

1. CPI Measures average price change; measures the household purchasing power using the Family Expenditure Survey
2. Survey finds out what consumers spend their income on
3. From this, a basket of goods is created
4. The goods are weighted according to how much income is spent on each item e.g. petrol has higher weighting than tea
5. Basket updated annually to account for changes in spending patterns

Question 4

What is the UK government macroeconomic objective for inflation?

Answer 4

For the inflation rate to be at 2% + or - 1 % (3% or 1%)

Question 5

Define inflation

Answer 5

The sustained increase in the general price level of goods and services in an economy over time

Question 6

Formula for CPI

Answer 6

Current CPI - Previous CPI / Previous CPI ( X 100)

Question 7

Give the limitations of using CPI

Answer 7

• CPI may not adequately account for quality improvements in goods and services over time; result in overestimation of inflation
• only representative of the average household
• hard to make historical comparisons - time lag

Question 8

Define devaluation

Answer 8

When the value of currency is officially lowered in a fixed exchnage rate system

Question 9

What are the costs and benefits to devaluing the currency?

Answer 9

Benefits

• makes exports cheaper, making them more affordable and competitive in international markets
• increase economic growth by stimulating exports
• improves the current account as exports increase and imports become more expensive

Costs

• Inflation likely to increase as imports are more expensive, leading to demand-pull inflation
• Government and central bank may not accurately predict the ideal currency value, potentially disrupting the balance of payments
• holding large reserves of foreign currency to maintain a devalued currency may be costly and challenging

Question 11

Define the balance of payments

Answer 11

A record of all the economic transactions between a country and the rest of the world.

Divided into two sections; the current account and the capital and financial account