Causes of Deflation
Study Edexcel Economics deflation questions by linking falling aggregate demand, lower costs, monetary policy and delayed spending to a lower price level.
- Syllabus
- 2019
- Course
- Economics YEC11
- Level
- AS
Exam points
- Define deflation as a sustained fall in the general price level or a negative inflation rate.
- Explain how lower consumption, investment, government spending or net exports can reduce AD and cause deflation.
- Link lower input costs, tighter policy or expectations of falling prices to further downward pressure.
2.3.1.2f - Causes of deflation: • falling aggregate demand (AD) • increase in aggregate supply question 1
[Maximum number: 20]
In July 2021 Rwanda's inflation rate was -1.1\% and in November 2021 it was -3.4\%.
Evaluate possible causes of deflation. Refer to a country of your choice in your answer.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance.
The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
Knowledge, Application and Analysis ( 12 marks) - indicative content
- Understanding of deflation
- "In July 2021 Rwanda's inflation rate was -1.1\% and in November 2021 it was −3.4%′′
Possible causes include:
- Decrease in AD as a result of -
- lower consumption/higher savings
- lower levels of gross/net investment
- lower government spending/public expenditure
- lower net trade/fall in exports/increase in imports
- deflationary fiscal policy e.g. lower rates of direct taxes
- deflationary monetary policy e.g. lower money supply/increase in the base rate of interest
- expectations of deflation means that consumers may delay their purchases to see if the price decreases again
- Increase in SRAS as a result of -
- decrease in indirect taxes
- fall in costs of raw materials and energy
- increase in the external value of the currency making imports relatively cheaper
- Increase in LRAS as a result of -
- competition policy
- increases in productivity
- increase in net migration
- technological advancements
- improvements in education and skills
Credit use of relevant AD/AS diagrams
NB Award a maximum of Level 3 for answers with no reference to a country in their answer
Level
Mark Descriptor
Level 0
Level 1
1-3
Level 2
4-6
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident, but they may not be developed fully, or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Significance of the most important factor changes over time
- It is likely to be a combination of factors contributing to deflation
- Magnitude of the deflation will be dependent on the size of any shifts in AD and AS: it is likely to be relatively large for Rwanda
- Demand-pull deflation (decrease in AD) is often seen as more negative as the lack of AD is what causes the deflationary pressure
- Fiscal policy and/or monetary policy takes time to impact AD
- Cost-push deflation (increase in SRAS) is often seen as a more positive cause as the supply side is improving
- If the external value of the currency decreases then the relative price of imports will increase
- Prices of raw materials and oil are highly volatile and likely to increase as AD increases as the world economy recovers
- Supply-side impacts (increase in LRAS) are likely to have a long-term effect only causing deflation after a significant time lag
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.
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