The problems of measuring inflation Inflation is a simple concept, but price indices are surprisingly hard to construct. Content removed due to copyright restrictions Table 1.1: Changes in the US Consumer Price Index, April 2015–January 2016 US Consumer Price Index (January 1983 = 100) April 2015 236.0 July 2015 238.1 October 2015 238.0 January 2016 238.1 Source: Adapted from www.tradingeconomics.com and US Bureau of Labor Statistics

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [2] April 2015: 236.0 January 2016: 238.1 Increase of 2.1 divided by 236.0 = 0.88383% Accept answers of and between 0.8% and 0.9%
2. [1] 1 mark for use of the correct formula, but with an incorrect answer
3. [2] The weights give an indication of the relative importance of expenditure on different items by people in an economy This takes into account the fact that price rises of some goods and services will have a more significant effect than the price rises of other goods and services; this will give a more accurate indication of the overall price level change. (1 mark)
4. [1] Examples: Food, housing and transport are likely to be given a higher weighting than other items because these usually represent a higher proportion of the average person's expenditure (the question does refer to examples, so there must be more than one example included in the explanation) (1 mark)
5. [1] An answer that does not use examples to support the explanation can only gain 1 mark
6. [2] The Digital Price Index (DPI) could be used more extensively to measure the rate of inflation in the future. The DPI has several advantages over the conventional approach.
7. [0] The Digital Price Index (DPI) includes three-quarters of online spending at America's top 500 retailers. It tracks 1.4 m products, compared with the CPI's 80 000, so it is a more comprehensive indicator with a greater number of items.
8. [0] It is based on actual purchases rather than advertised prices, increasing its accuracy.
9. [0] It is easier to collect the data electronically once the database is established.
10. [0] It is likely to be easier to keep up-to-date.
11. [0] There will be time to make improvements to overcome its current weaknesses and omissions
12. [1] Explanation: The case study does suggest that official statistics may be missing significant price movements, especially in electrical goods. It was found that the price of computers fell by 13.1% in the year to January 2016, almost double the 7.1% fall recorded in the CPI. This could be because of an increase in supply in the market for computers, causing the equilibrium price in the market to fall; this could arise because of a fall in the cost of components, improvements in technology or more competition from new entrants into the market. The CPI fall would be less as it includes price changes of products whose prices fell less than that of computers, remained unchanged or rose; the average will be less than a single item (1 mark for the explanation)
13. [1] Diagram: P, Q, D and S all correctly shown and labelled [1]
14. [1] Shift of the supply curve to the right [1]
15. [1] Fall in equilibrium price and rise in equilibrium quantity [1]
16. [3] (Up to 3 marks for the diagram)
17. [2] A borrower will benefit from inflation (1) because the borrower will be paying less back in real terms (1) (Up to 2 marks)
18. [2] A saver will be made worse off by inflation (1) because the saver will be receiving less back in real terms (1) (Up to 2 marks)
19. [6] Monetary policy is sometimes used to control the rate of inflation in an economy, especially when the rate of inflation rises above the targeted rate of inflation. Changes in interest rates and/or the supply of money can be used to bring down the rate of inflation. Decisions about the correct changes in the rate of interest and/or the money supply will be taken in relation to what is known about the rate of inflation. However, if the rate of inflation in an economy is not measured accurately, the decisions taken in relation to changes in the rate of interest and/or the money supply may not be the correct ones. In such a situation, monetary policy will not operate effectively and the rate of inflation may eventually be higher or lower than what was intended when the monetary decisions were taken.
20. [4] For identification and explanation of how these monetary policies might be used to cure inflation. (Up to 4 marks)
21. [2] For evaluative comment on whether monetary policy can operate effectively if inflation is not measured accurately. (Up to 2 marks, reserve 1 mark for a conclusion)