Exam tip 1
When defining price stability, always state that it refers to a low and stable rate of inflation, not an absence of it. This nuance demonstrates a deeper understanding and is crucial for higher-level marks.
9708 · 4.6
Price stability — common mistakes
Common exam mistakes on 9708 Price stability. Learn what loses marks, then practise the topic with Examiner’s Ink.
Exam tip 2
In AD/AS diagrams for demand-pull inflation, ensure you clearly label the initial and new equilibrium points, showing an increase in both the price level (from P to P1) and real GDP (from Y to Y1) along the SRAS curve.
Exam tip 3
When explaining cost-push inflation, always link a specific cause (e.g., rising oil prices) to the leftward shift of the SRAS curve and the resulting 'stagflation' – the combination of higher inflation and lower real GDP.
Exam tip 4
State the transmission mechanism: e.g. "Higher oil prices raise firms' costs → SRAS shifts left → equilibrium P rises from P₁ to P₂." Marks are awarded for linked analysis, not just labels.
Is zero inflation the ideal form of price stability?
No. Price stability is typically defined by central banks as a low, stable, and positive rate of inflation, usually around 2%. Zero inflation is considered risky because a small economic shock could easily tip the economy into deflation, which is very damaging. A small amount of inflation also 'greases the wheels' of the labour market, allowing for real wage adjustments more easily.
Can inflation be caused by both demand-pull and cost-push factors at the same time?
Yes, this is common. For example, a government might increase its spending (demand-pull) at the same time as global oil prices are rising (cost-push). This combination can lead to particularly high and persistent inflation, making it difficult for policymakers to address, as tackling one cause (e.g., raising interest rates to curb demand) might worsen the effects of the other (by further reducing output).
If my wages increase by 4% and inflation is 3%, have I really had a pay rise?
Yes. It is crucial to distinguish between nominal and real values. Your nominal wage has increased by 4%. However, the purchasing power of your money has decreased by 3% due to inflation. Your 'real' wage increase is the nominal wage increase minus the inflation rate. In this case, your real wage has increased by approximately 1% (4% - 3%), meaning you can buy 1% more goods and services than before.