Inflation and deflation
Cambridge IGCSE Economics (0455) · Unit 4: Government and the macroeconomy · 10 flashcards
Inflation and deflation is topic 4.8 in the Cambridge IGCSE Economics (0455) syllabus , positioned in Unit 4 — Government and the macroeconomy , alongside Government role in economy, Macroeconomic aims and Fiscal policy. In one line: Inflation is a sustained increase in the general price level in an economy. Disinflation is a decrease in the *rate* of inflation, meaning prices are still rising, but at a slower pace. Inflation means prices are rising faster.
This topic is examined in Paper 1 (multiple-choice) and Paper 2 (structured questions, including data-response items).
The deck below contains 10 flashcards — 3 definitions, 6 key concepts and 1 application card — covering the precise wording mark schemes reward. Use the 3 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.
Inflation and disinflation. What is the key difference between the two
Inflation is a sustained increase in the general price level in an economy. Disinflation is a decrease in the *rate* of inflation, meaning prices are still rising, but at a slower pace. Inflation means prices are rising faster.
Questions this Inflation and deflation deck will help you answer
- › Explain the concept of deflation, including its potential economic consequences.
- › Explain cost-push inflation, giving a specific example of a cause.
- › Explain demand-pull inflation, giving a real-world example.
- › Discuss two potential negative consequences of high inflation on an economy.
- › Discuss two potential negative consequences of deflation on an economy.
Define inflation and disinflation. What is the key difference between the two?
Inflation is a sustained increase in the general price level in an economy. Disinflation is a decrease in the *rate* of inflation, meaning prices are still rising, but at a slower pace. Inflation means prices are rising faster.
Explain the concept of deflation, including its potential economic consequences.
Deflation is a sustained decrease in the general price level. It can lead to decreased consumer spending as consumers delay purchases expecting further price drops, leading to decreased production and economic stagnation. This is known as a deflationary spiral.
What is hyperinflation, and what are its likely effects on an economy?
Hyperinflation is extremely rapid or out-of-control inflation. It erodes purchasing power quickly, destabilizes the economy, encourages spending rather than saving, and can lead to a breakdown in the monetary system. An example is Zimbabwe in the late 2000s.
Describe the Consumer Price Index (CPI) and its purpose in measuring inflation.
The CPI is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. It is used to track inflation, adjust wages and pensions, and assess the impact of price changes on living standards.
Explain cost-push inflation, giving a specific example of a cause.
Cost-push inflation occurs when there is an increase in the costs of production for firms, which they pass on to consumers through higher prices. An example is a sharp rise in oil prices, which increases transportation and production costs.
Explain demand-pull inflation, giving a real-world example.
Demand-pull inflation occurs when there is an increase in aggregate demand that outpaces the economy's ability to produce goods and services. This leads to a general rise in prices.
Discuss two potential negative consequences of high inflation on an economy.
High inflation erodes purchasing power, making it more difficult for people to afford goods and services. It also creates uncertainty for businesses, discouraging investment and long-term planning, and reduces international competitiveness.
Discuss two potential negative consequences of deflation on an economy.
Deflation can lead to delayed spending as consumers expect prices to fall further, leading to a decrease in aggregate demand and economic activity. It also increases the real burden of debt, making it more difficult for individuals and businesses to repay loans.
How might a central bank use interest rates to combat inflation?
A central bank can raise interest rates to combat inflation. This makes borrowing more expensive, which reduces consumer spending and investment, thereby decreasing aggregate demand and putting downward pressure on prices.
Explain how an increase in wages can contribute to inflation.
An increase in wages can lead to cost-push inflation if businesses increase prices to cover these higher labor costs. It can also lead to demand-pull inflation if higher wages increase consumer spending, driving up demand for goods and services.
Key Questions: Inflation and deflation
Define inflation and disinflation. What is the key difference between the two?
Inflation is a sustained increase in the general price level in an economy. Disinflation is a decrease in the *rate* of inflation, meaning prices are still rising, but at a slower pace. Inflation means prices are rising faster.
What is hyperinflation, and what are its likely effects on an economy?
Hyperinflation is extremely rapid or out-of-control inflation. It erodes purchasing power quickly, destabilizes the economy, encourages spending rather than saving, and can lead to a breakdown in the monetary system. An example is Zimbabwe in the late 2000s.
Describe the Consumer Price Index (CPI) and its purpose in measuring inflation.
The CPI is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. It is used to track inflation, adjust wages and pensions, and assess the impact of price changes on living standards.
More topics in Unit 4 — Government and the macroeconomy
Inflation and deflation sits alongside these Economics decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.
Cambridge syllabus keywords to use in your answers
These are the official Cambridge 0455 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.
Key terms covered in this Inflation and deflation deck
Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.
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