Inflation and unemployment are two economic problems that governments usually have to deal with.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2014). The mark or mark type is shown in brackets.

1. [4] Up to 2 marks: demand-pull inflation is where the rising level of total (aggregate) demand in an economy/aggregate demand exceeds aggregate supply (1) pulls up the general level of prices in an economy (1). It is associated with higher output/GDP/incomes (1) caused by e.g. higher consumer spending (1). Allow, but do not expect, up to 2 marks for an AD/AS diagram which shows the relevant curve shifting and the effect on the price level. Up to 2 marks: cost-push inflation is where the costs of production rise (1) such as wages and raw materials (1) leading firms to increase prices in order to ensure the profitability of the business (1), it may be associated with falling output/GDP/incomes (1). Allow, but do not expect, up to 2 marks for an AD/AS diagram which shows the relevant curve shifting and the effect on the price level.
2. [6] Up to 2 marks: increases cost of living (1), people are worse off if incomes do not rise as much as prices (1) because purchasing power will be less (1). Up to 2 marks: this is a particular problem for those on fixed incomes (1) compared to others who at least get some increase in their wages each year (1). Up to 2 marks: lenders become more reluctant to lend money (1) and this can reduce the extent of liquidity in the economy/reduce investment (1). Up to 2 marks: it can lead to uncertainty and a lack of confidence in the economic future of a country (1), making firms reluctant to invest (1). Up to 2 marks: if the prices of exports go up, this will make them less competitive in foreign markets (1); this could lead to a reduction in demand and a consequent increase in unemployment (1) and may cause a current account deficit (1).
3. [4] Up to 2 marks: frictional unemployment occurs when people are in between jobs/there is a mismatch between the demand for, and the supply of, labour (1), it tends to be short-term (1) and there are various types of frictional unemployment, such as search, casual and seasonal unemployment (1) whereas Up to 2 marks: cyclical unemployment is unemployment on a larger scale (1) than frictional unemployment as it is linked to downturns in the trade cycle (1), it can also be called demand-deficient unemployment (1) as the level of aggregate demand is low in the economy, e.g. at a time of a recession (1).
4. [6] Up to 4 marks on the possibility of a conflict: Up to 3 marks: a government expansionary policy measure e.g. increase in its expenditure, in order to reduce the rate of unemployment or, for example, there may be a consumer boom (1), higher total demand (1) and this leads to a situation of demand-pull inflation (1). Up to 3 marks: a fall in the rate of unemployment, making labour scarcer/trade unions stronger (1), this will push up the wages of labour (1) and this could contribute to cost-push inflation (1). Note: may alternatively examine how a government contractionary policy measure to reduce inflation or other cause of a fall in total demand may affect unemployment. Up to 4 marks on the possibility that there might not be a conflict: Up to 3 marks: supply side measures (1), examples (1) there may be increases in e.g. investment (1) could allow both to be achieved (1). Up to 2 marks: reducing inflation could increase the competitiveness of exports (1) and this could lead to an increase in employment to supply those exports (1). Up to 2 marks: reducing inflation could provide greater certainty (1) which may stimulate investment (1). Maximum of 3 marks for a list or list-like answer.