IB Economics HL 3.3.6 Deflation and Disinflation Questions

Level

0 The work does not reach a standard described by the descriptors below.

1 The written response is limited.

For an AD/AS diagram showing a decrease in aggregate demand and a fall in real output and APL or an explanation such as those offered below.

2 The written response is accurate.

For an AD/AS diagram showing a decrease in aggregate demand and a fall in real output and APL and an explanation such as those offered below.

Reasons may include:
- deflation discourages spending by consumers who postpone purchases in the expectation of lower prices. As a result, aggregate demand decreases, reducing the level of output and employment
- deflation discourages borrowing as the real value of debt increases. This may reduce the level of investment and consumer spending, and thus aggregate demand, reducing the level of output and employment as a result
- as the real value of debt increases, bankruptcies may result, with the closure of firms creating greater unemployment
- any other reasonable explanation should be rewarded.

If a candidate draws an accurate diagram but explains only that AD decreases, APL decreases (hence deflation) and GDP decreases (hence greater unemployment) then a maximum of [3] may be awarded.
Candidates who incorrectly label diagrams can be rewarded with a maximum of [3].

For AD/AS, the vertical axis may be price level, average price level, or inflation.
The horizontal axis may be output, real output, national output, real national output, national income (Y), or GDP. Any appropriate abbreviations, such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
NB do not penalise candidates who label the vertical axis APL followed by a currency (eg APL($))