CCEA A Level Economics
CCEA A Level Economics AS 2 Inflation Exam Questions
Free CCEA A Level Economics revision for AS 2 Inflation: what you need to know, common mistakes and exam-style questions with answers. Covers measuring inflation with CPI and RPI, index numbers, demand-pull and cost-push causes, and costs of inflation and deflation.
Practise AS 2 Inflation with past papers
Once you have learnt this topic, find the AS 2 Inflation questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics AS 2 Inflation
Inflation is one of the core macroeconomic problems in Unit AS 2: Managing the National Economy. You need to define inflation as a sustained rise in the general price level, explain how it is measured using the Consumer Prices Index (CPI) and the Retail Prices Index (RPI), and work with index numbers. You then explain the causes of inflation, demand-pull and cost-push, using AD/AS diagrams, and analyse the costs of inflation for consumers, firms and the economy, as well as the problems of deflation. CCEA papers often include an index number calculation, a distinction between CPI and RPI, and an evaluation of how harmful a given inflation rate is.
What you need to know
- Definition Inflation is a sustained increase in the general price level, which reduces the purchasing power of money. Deflation is a sustained fall in the general price level; disinflation is a fall in the rate of inflation.
- CPI and RPI Both use a weighted basket of goods and services based on household spending surveys. RPI includes mortgage interest payments and council tax, which CPI excludes, so RPI is usually higher. The UK target uses CPI.
- Index numbers Index = (value in year / value in base year) x 100. Percentage change between years = (new index - old index) / old index x 100.
- Demand-pull inflation Caused by AD rising faster than the economy's capacity, for example from rising consumer confidence, lower interest rates or government spending. Shown by AD shifting right near full capacity.
- Cost-push inflation Caused by rising costs of production, such as wages, energy, imported raw materials (after a depreciation) or higher indirect taxes. Shown by SRAS shifting left.
- Costs of inflation Reduces real incomes of those on fixed incomes, creates uncertainty that discourages investment, makes exports less competitive, causes menu and shoe-leather costs, and redistributes from savers to borrowers. Deflation can delay spending and raise the real value of debt.
Common mistakes in AS 2 Inflation
- Defining inflation as rising prices without saying sustained and general.
- Saying a fall in the inflation rate means prices are falling; prices are still rising, just more slowly.
- Subtracting index numbers and calling the result a percentage change; divide by the old index first.
- Showing cost-push inflation with an AD shift; rising costs shift SRAS to the left.
- Assuming all inflation is harmful; low, stable inflation is the target and is generally beneficial.
Try three AS 2 Inflation exam-style questions
1. A price index rises from 120 to 126. Calculate the rate of inflation. (2 marks)
Show the mark scheme answer
(126 - 120)/120 x 100; = 5%.
2. Using an AD/AS diagram, explain cost-push inflation caused by a rise in energy prices. (6 marks)
Show the mark scheme answer
Energy is a major input cost for firms; SRAS shifts left; price level rises; real output falls; labelled diagram with original and new equilibrium; may lead to a wage-price spiral if workers demand higher wages.
3. Evaluate the view that inflation is always harmful to an economy. (8 marks)
Show the mark scheme answer
Costs: fall in real incomes, uncertainty reducing investment, loss of competitiveness, redistribution from savers; but mild inflation can encourage spending and investment, reduce the real burden of debt and allow real wage adjustment; deflation can be more damaging; harm depends on rate, whether anticipated, and comparison with trading partners; conclusion.
AS 2 Inflation FAQs
What does CCEA A Level Economics AS 2 Inflation cover?
The definition of inflation, measurement using CPI and RPI, index numbers, demand-pull and cost-push causes, and the costs of inflation and deflation.
Which unit is this topic examined in?
It is in Unit AS 2: Managing the National Economy, a 1 hour 30 minute paper with short-answer questions, a case study and an extended response question.
What calculations do I need for inflation?
Index numbers from raw data, percentage change between two index values, and converting nominal values into real values by dividing by the price index and multiplying by 100.
