To what extent is inflation a serious economic problem.

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To what extent is inflation a serious economic problem

Inflation is defined as the general and sustained increase in prices of goods and services. It is caused by many factors, but in particular three factors have a major effect on the value of inflation.

The first cause is too much demand within the economy. This occurs when an increase in demand cannot be countered by an increase in production in the short term due to fixed factors (e.g. land) and so producers will increase the prices to decrease demand for their products. Aggregate demand, the demand within the whole economy, suddenly rises for a product for two reasons in particular. The first is that inflation has been so low in the economy that tax revenue, for example has been falling, due to less spending and increased saving, so in order to 're-flate' prices. They provide subsidies and ask for a lowering of interest rate to boost spending and 're-flate' the economy. The second reason maybe that greater consumer confidence within the economy has lead to increased spending and thus Aggregate demand increasing.

This will mean that prices for consumers have risen, due to producers 'pulling' up their prices. There could be a disadvantage to pulling the prices up. To begin with, by pulling prices up, in the future, demand will fall and we will see that profits fall for producers, as a result of less revenue. Thus redundancies have to be made as the margin of profit is not enough to subsidise the cost of production, due to profit margins falling. Aggregate Demand Shifts from AD1 to AD2 and so price goes up. (Below)

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When costs rise then eventually these costs will have to be subsidised and the only way to do this is if the cost is passed on to the consumer. For example if a new legislation came out on a higher minimum wage the cost of production will increase. These higher wage demands have no link to productivity increasing and so the total cost for firms will increase. The cost will be passed on to the product or service, to be paid by the consumer and so inflation increase. This could cause what is known as a 'Wage price spiral,' higher wages lead to and increase in inflation (cost push) which leads to and thus an increase in prices and so an increase in wages to afford the increased prices and so on. However, wages are not the only things that cause the costs for firms to rise. An increase in the cost of raw materials, a major key in the production process, due to , for example and fall in the value of the pound, if the materials were being imported, could be the reason for costs to increase as less an be bought and so costs will have to be subsidised using a smaller output, prices rise. Alternatively the monopoly power of suppliers in an economy can be causing cost push inflation. This is because many firms can put prices as high as they want. This may be regarded as unfair because the consumer has no choice as there are no substitutes for the good. Cost of production increases so supply is restricted, supply falls (AD1 to AD2), and price increases.
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Price AS2

AS1

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Inflation is regarded to be a problem in many economists' eyes.

Employees' expectations have an important role in inflation. If employees expect inflation they will ask for an increase in wages thus causing inflation that they expected. The government tries to reduce inflation by reducing employee belief that inflation will occur.

The redistribution of income is a problem that will affect many. Many people without the ability to bargain for higher wages, for example without trade unions, as inflation increases the purchasing power of their ...

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The structure here is strong, as it has a clear introduction and progresses through knowledge and analysis, giving the foundations for the later evaluation. By doing this, it makes it easier for examiners to allocate marks. Technical terms are used fluently, and the style is strong which makes for a convincing argument. Spelling, punctuation and grammar are strong. An essay to be admired!

The analysis here is superb. The definition of inflation is clear, and the causes of inflation are outlined well. I particularly liked the use of diagrams to show the effects of inflation, as that's what this question is implicitly wanting. There needs to be a discussion of the effect on real GDP and the price level, and this essay manages this with diagrams. A suggestion with diagrams would be to have a sentence such as "An increase in aggregate demand causes a shift from AD to AD1, which causes macroeconomic equilibrium to change, with P moving to P1 and Q increasing to Q1". A sentence such as this is an easy way to secure analysis marks. The main costs and consequences of inflation are explained well. The mechanisms are explained step by step, showing how an increase in inflation will affect businessmen, etc. Such technique shows strong understanding of the technical concepts. What was very strong in this essay was the consideration of viewpoints. They are right to question whether each party will see inflation as a serious problem, and goes onto discuss whether inflation is seen differently. Perceptive evaluation is what they are looking for when awarding the top marks.

This essay engages superbly with the question. There is a clear progression from knowledge of what inflation is, how it affects the economy, and then a discussion of the extent to which it is serious. The key part that this essay addresses, that most others don't, is the extent. By doing this, this essay is able to access all the levels and will gain the top marks due to the perceptive analysis and evaluation throughout. I liked how they used phrases such as "it depends upon" as this shows a strong awareness that economics isn't clear cut, and it varies with each situation.