Fig. 1 shows the annual inflation rate in a small economy. The central bank has an inflation target of 2%. 6%4%2%02020202120222023Inflation rate© EAGLE BEAC...
Question 1 Report
Fig. 1 shows the annual inflation rate in a small economy. The central bank has an inflation target of 2%.
(a) Which year had inflation furthest above the target? [1]
(b) Explain one problem caused by inflation above the target. [1]
Answer Details
(a) 2021 had inflation furthest above the 2% target. [1] The graph shows the highest plotted inflation rate in that year, so its gap above the target is greatest.
(b) Inflation above target can reduce the purchasing power of income: if prices rise faster than income, households can buy fewer goods and services with the same amount of money. [1] Less predictable prices or reduced export competitiveness are also valid problems.
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