Explain, with the help of a diagram(s), how changes in aggregate demand and aggregate supply can cause inflation in an economy.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. [1] (a) Knowledge and Understanding: 1 mark for diagram showing change in aggregate demand.
2. [1] (a) Knowledge and Understanding: 1 mark for diagram showing change in aggregate supply.
3. [3] (a) Application: Up to 3 marks for an explanation in relation to changes in AD and the cause of inflation in an economy (Demand-pull inflation: reflationary policies by a government; increased consumer spending, e.g. as a result of greater consumer confidence).
4. [3] (a) Application: Up to 3 marks for an explanation in relation to changes in AS and the cause of inflation in an economy (Cost-push inflation: wage increases to employees which are not linked to higher productivity; an increase in the cost of imported raw materials, e.g. because of a fall in the value of a currency; an increase in input prices, e.g. because of the monopoly power of suppliers or higher energy prices).
5. [4] (b) Analysis: Up to 4 marks for analysis of the problems of inflation (e.g., redistribution of income; investment planning difficulties for firms; uncompetitiveness of exports (depending on relative inflation rates in different countries); menu costs; shoe leather costs).
6. [4] (b) Analysis: Up to 4 marks for analysis of the problems of deflation (e.g., fall in economic activity/output; rise in unemployment).
7. [3] (b) Evaluation: For exercising some judgement on whether deflation is more of a problem in an economy than inflation.
8. [1] (b) Evaluation: For a conclusion.