Advantages and disadvantages of:
Inflation:
Advantages
Deflation is more damaging – lead to lower
consumer spending and lower growth. Prices
falling, people likely to delay purchase in hope
of cheaper prices in the future
Moderate inflation allows prices to adjust to
attain their real price
Are a sign of healthy economy
Inflation can boost growth – at times of v low
inflation, the economy maybe stuck in
recession. CONTRVERSIAL
Economic growth:
Advantages
Higher living standards – more g/s consumed,
better standard of living
Employment effects – sustained growth
stimulates jobs = lower unemployment rate
Fiscal dividend - benefit to gov. Boots rev from
tax = amount it spends on welfare = goes down
= as unemployment and income goes up = then
brings does fiscal policy
Accelerator effect
Unemployment
Advantages
Low wage rates - Reduced power of workers to
bargain for higher wages/salaries
Reduce inflationary pressure
Reduced environmental damage
Disadvantages
Its argued that countries with persistently higher
inflation have lower rates of investment and
economic growth
Higher inflation – lower international
competitiveness = fewer exports
Leads to declining incomes
Costs of reducing inflation; they must pursue
deflationary fiscal/monetary policy. Leads to
lower AD and often a recession.
The cost of reducing inflation is unemployment- in
the short term
Disadvantages
Costs- risk of inflation – gdp is rising faster than
trend growth = demand pull and cost push
inflation
Environmental effects- negative externalities:
pollution and waste. Unsustainable finite
resources
Inequalities of income and wealth – many of
the gains from growth may only go to a few
people
Disadvantages
Waste of resources/opportunity cost of lost
potential output (PPF)
Less economic growth
Hysteresis effect - Longer the person is out of work,
greater the loss of skills/motivation -> less incentive
to find a work, become reliant on state welfare ->
rise in structural employment and natural rate of
unemployment
Higher crame rates, divorce rates, poorer health &
lower life expectancy = less LABOUR
Factors affecting supply and demand

An increase in supply occurs when more is supplied at each price, this could occur for the following
reasons:

1. A decrease in costs of production. This means business can supply more at each price. Lower
costs could be due to lower wages, lower raw material costs
2. More firms. An increase in the number of producers will cause an increase in supply.
3. Investment in capacity. Expansion in capacity of existing firms, e.g. building a new factory
4. Related supply. An increase in supply of a related good e.g. beef and leather
5. Weather. Climatic conditions are very important for agricultural products
6. Technological improvements. Improvements in technology, e.g. computers, reducing firms
costs
7. Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods
8. Government subsidies. Increase in government subsidies will also reduce the cost of goods,
e.g. train subsidies reduce the price of train tickets.

A shift to the right in the demand curve can occur for a number of reasons:

1. Income. An increase in disposable income enabling consumers to be able to afford more

goods. Higher income could occur for a variety of reasons, such as higher wages and lower
taxes.
2. Quality. An increase in the quality of the good e.g. better quality digital cameras encourage
people to buy one.
3. Advertising can increase brand loyalty to the goods and increase demand. For example,
higher spending on advertising by Coca Cola has increased global sales.
4. Substitutes. An increase in the price of substitutes, e.g. if the price of Samsung mobile
phones increases, this will increase the demand for Apple iPhones – a major substitute for
the Samsung.
5. Complements. A fall in the price of complements will increase demand. E.g. a lower price of
Play Station 2 will increase the demand for compatible Play Station games.
6. Weather: In cold weather there will be increased demand for fuel and warm weather
clothes.
7. Expectations of future price increases. A commodity like gold may be bought due to
speculative reasons; if you think it might go up in the future, you will buy now.
Fiscal and monetary policy INTEREST RATES AND BANKS

Monetary policy - process by which the central bank controls cost of short term borrowing or the
monetary base- often targeting an inflation rate or interest rate to ensure price stability

 Higher interest rates increase borrowing costs and reduce consumers spending and
investment= LOWER AD AND LOWER INFLATION
 Economy goes into recession = central bank would cut interest rates

Fiscal policy – carried out by government and involves changing levels of government spending and
levels of taxation

1. Increase demand and economic growth = government will cut tax and increase spending
=LEADS TO HIGHER BUDGET DEFICIT

BUDGET DEFICIT- gov spending more than they take in via tax revenue. They will then have to
borrow from financial markets and sell gilts. This adds to public debt. They pay interest

2. To reduce demand and reduce inflation, the government can increase tax rates and cut
spending (leading to smaller budget deficit)

Definitions:

1. Inflation
2. Supply / AS
3. Demand /AD
4. Fiscal policy
5. Monetary policy
6. Multiplier effect
7. Consumer and producer surplus