Household debt in South Korea in 2014 was reaching record levels. People were borrowing more and saving less: the savings ratio fell from 19% in 1985 to 4% in 2014. Despite the low rate of saving, there was little demand-pull or cost-push inflation. Indeed, in 2014 the country came close to experiencing deflation.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2016). The mark or mark type is shown in brackets.

1. [2] (a) A fall (1) in the price level (1) Or: An increase in the value (1) of money (1).
2. [4] (b) Up to 2 marks for demand-pull inflation: Demand-pull inflation is caused by excess demand (2). Demand-pull is caused by total demand increasing more rapidly (1) than total supply (1). Higher demand may be the result of higher consumer spending/higher government spending/higher investment/ higher net exports (1). An AD/AS diagram showing AD increasing (1). Up to 2 marks for cost-push inflation: Cost-push inflation is caused by increases in the costs of production (1), e.g. higher wages/higher raw material costs/higher import costs/higher indirect taxes (1). Firms pass on higher costs in the form of higher prices to maintain profit levels/margins (1). An AD/AS diagram showing AS decreasing (1).
3. [6] (c) It might increase the rate of interest (1) this would increase the cost of borrowing (1) this may discourage households from buying items/encourage saving (1) that would require them to take out a loan (1). It might impose restrictions on the amount that banks can lend (1) these may limit the size of a loan a household can get (1) or increase the conditions that have to be met before a loan is given (1). It might reduce the money supply (1) which may reduce spending (1) and so may reduce demand for loans (1).
4. [8] (d) Up to 5 marks for why it should: Would provide funds for bank lending (1) this may increase investment (1) leading to economic growth (1). May enable people to save for their retirement (1) which may reduce the need for state pensions (1). May enable people to save in case of financial difficulties in the future/avoid getting into debt (1) which may reduce their dependency on the state should unexpected events/problems occur (1). May reduce inflation (1) by reducing consumer expenditure (1). May correct a current account deficit (1) lowering spending on imports (1). Up to 5 marks for why it should not: Lowering consumer expenditure (1) may increase unemployment (1) cyclical unemployment (1). May lower economic growth/cause a recession (1) a government may need to encourage spending rather than saving (1). If there is deflation (1) higher saving could drive the price level lower (1).