Both the annual inflation rate and the economic growth rate fell in Pakistan between 2012 and 2013. Some economists suggested that the Government should try to lower inflation further by reducing government spending. Lower inflation might increase economic activity and reduce unemployment.

Mark scheme

Marking points from the official mark scheme (May/June 2015). The mark or mark type is shown in brackets.

1. [2] (a) People without jobs (1) who are willing/able to work/who are members of the labour force/ economically active (1)
2. [4] (b) • improvements in education or other supply-side policy (1) may raise the quality of resources/this will increase productive capacity (1) • advances in technology (1) will increase total demand/productive capacity (1) • net investment/MNCs entering the country (1) will increase total demand/productive capacity (1) • increase in net exports (1) will increase total demand (1) • a consumer boom (1) will increase total demand/which will encourage firms to produce more (1) • expansionary fiscal or monetary policy (1) may increase total demand/which may make use of previously unused resources (1) • increase in size of labour force/employment rate (1) will increase total demand/productive capacity (1) • fall in unemployment (1) will increase total demand (1) • discovery of minerals (1) more raw materials will enable firms to produce more (1)
3. [6] (c) • a fall in the inflation rate may make the country's products more internationally competitive (1) • purchasing power will be higher than in the case of a higher inflation rate (1) • demand for the country's products may increase (1) • to produce more, a higher number of workers will be employed (1) • cyclical unemployment may fall (1) • a lower inflation rate may reduce the growth in wage rates (1) this may encourage firms to take on more workers (1) • a lower inflation rate may attract multinational companies to set up in the country (1) this may create new jobs (1) • a lower inflation rate may enable a country to have a lower interest rate (1) this would reduce the cost of borrowing/may encourage investment/encourage more total demand (1)
4. [8] (d) Up to 5 marks for why it might: • lower government spending is contractionary fiscal policy (1) it will reduce demand for goods and services (aggregate demand) (1) • lower demand may discourage firms from raising prices (1) reduce demand-pull inflation (1) • lower government spending may increase unemployment (1) this could put downward pressure on wages (1) lower cost-push inflation (1) Up to 5 marks for why it might not: • lower government spending on education and health care (1) may reduce the quality of the labour force (1) this could lower productivity (1) raise wage costs (1) cause cost-push inflation (1) • lower government spending on infrastructure (1) will increase firms' transport costs (1) causing cost-push inflation (1) • lower government spending may be offset by other causes of inflation (1), e.g. a lower exchange rate/consumer boom (1) • reduction in government subsidies to firms (1) will raise costs of production (1) causing cost-push inflation (1) • inflation may be caused by other factors (1) identification of another cause (1) policy measure to correct other cause (1) explanation of how policy measure would work (1)