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Economics IGCSEPDF 100
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Question 8.3 (8 Marks)
Discuss the possible causes and consequences of a period of
economy.
deflation
Aggregate Demand
Aggregate Supply (AS)
●
●
for a country's
P1: Causes of Deflation
○
○
K: Deflation is a sustained fall in the general price level.
An: Bad Deflation is caused by a large and persistent fall in
(AD) (e.g., a recession causing mass saving and low confidence).
○ An: Good Deflation is caused by a large increase in
due to technological improvements and lower production costs.
P2: Consequences of Deflation (Focusing on Bad Deflation)
○ K: Falling prices cause firms' revenues and profits to drop, leading to cuts in
production and mass layoffs, which raises unemployment.
○ An: Consumers postpone spending and investment, expecting prices to fall
further, which further reduces AD and deepens the recessionary spiral.
● K: Cost-push inflation is caused by a rise in the costs of production for firms across
the economy, leading to a fall in Aggregate Supply (AS).
● A: Firms pass these higher costs on to consumers in the form of higher prices to protect
their profit margins.
● Cause: A sharp increase in the price of a key imported raw material, such as oil or
natural gas, or a large, negotiated increase in wage rates.
● K: High inflation is a rapid and sustained increase in prices, eroding the value of money.
● A: It causes uncertainty, making it difficult for firms to forecast future costs and profits,
which discourages long-term Investment.
● An: It results in a loss of purchasing power for people on fixed incomes (e.g.,
pensioners), worsening income inequality and potentially causing hardship.
● An: The country's exports become more expensive for foreigners, while imports
become relatively cheaper, worsening the Balance of Payments current account deficit.
● E: High inflation often leads to policy confusion and can spiral out of control, damaging
the overall confidence in the economy.
Solved Answers (Note Form)
Q8.1: Cost-Push Inflation (4 Marks)
Q8.3: Causes and Consequences of Deflation (8 Marks)
Q8.2: Negative Consequences of High Inflation (6 Marks)