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Question: Q1) Discuss whether inflation is necessarily harmful. (12)
Q2) Explain the functions of price in a market economy. (10)
Q3) Explain what influences the price elasticity of supply of a product. (8)
Q4) Explain the difficulties of measuring inflation accurately. (8)
Q5) Discuss the advantages and disadvantages of using indirect taxes to deal with the negative externalities associated with some products. (12)
Q6) Explain, with the aid of a diagram, how consumer surplus will be affected by the introduction of an indirect tax. (8)
Q7) How is inflation measured? (8)
Q8) Explain the market failure which arises from the characteristics of public goods (8)
Q9) Explain the effects of externalities on the allocation of resources. (8)
Q10) Explain how inflation affects the functions of money. (8)
Q11) Explain the effect of the removal of an indirect tax upon the market for a product.[8]
Q12) Explain the difference between expenditure-switching and expenditure-dampening policies as a means of correcting a balance of payments disequilibrium. [8]
Q13) Explain the difference between cost-push inflation and demand-pull inflation. [8]
Answer: Cost push inflation occurs when increasing costs of production are passed on to the consumers in the form of higher prices. This is inflation from the supply side of the economy. There are various factors leading to cost push inflation. First and foremost, the cause of inflation is attributed to an increase in wage costs. It is a widely held view that as prices rise, so real wages fall and this gives rise to another round of wage claims so that eventually a wage price spiral develops. Most cost-push theories are based on the existence of strong trade unions who make use of their monopoly power in the control of the supply of labour to push for wage increases in excess of those required to offset rising prices.
Besides, inflation may be transmitted into the local economy from other countries suffering from inflation. An increase in import prices for consumer goods will affect the cost...(short extract)
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- Subject: Economics
- Course: Economics
- Level: A-Level
- Year: Not applicable
- Mark: 81%
- Words: 3431
- Date submitted: August 28, 2012
- Date written: April, 2011
- References: No
- Document type: Essay*
- Essay ID: 4263
