WAEC SSCE - Economics - 1988

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The coefficient of price elasticity of demand measures how responsive the demand for a good or service is to a change in its price. When the coefficient is zero, it means that the quantity demanded does not change at all in response to a change in price. This occurs only when the demand is perfectly inelastic. In other words, the demand for a good or service is said to be perfectly inelastic when its price changes have no effect on the quantity demanded by consumers. This can happen when the good or service is a necessity with no substitutes, and consumers will continue to buy it regardless of its price.

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In a Free Market economy, the consumer is often referred to as "The King". This is because in a free market economy, the consumers play a crucial role in determining the supply and demand of goods and services. Since the consumers have the power to choose what to buy and what not to buy, they indirectly control the production and distribution of goods and services. Therefore, producers try to cater to the needs and wants of consumers to attract them to buy their products, leading to competition, innovation and efficiency in the economy. Hence, the saying "The customer is always right" and consumers are often referred to as "The King".

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The marginal propensity to consume is the change in consumption as a percentage of change in income. In other words, it is the proportion of additional income that a person or household spends on consumption. For example, if a household's income increases by $100 and they spend $80 of it on consumption, then their marginal propensity to consume is 0.8 (80/100). This concept is important in macroeconomics because it helps to predict how changes in income will affect overall consumption and, therefore, the level of economic activity in a country.

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Malthusian theory of population is best explained by the option: "The population increase faster than food supply". Malthusian theory of population was propounded by Thomas Malthus in the 18th century. According to him, population growth is geometric while food supply growth is arithmetic. This implies that while population grows at an exponential rate, food production only grows linearly. Malthus argued that population growth would eventually outstrip the ability of the earth to provide food, leading to widespread famine, disease, and death. Thus, he advocated for policies such as family planning to control population growth and prevent the negative consequences of overpopulation.

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The drawer of a cheque is the person who writes out the cheque. They are the ones who have the account from which the money is drawn and they are authorizing the payment to the payee, which is usually another person or an organization. The drawer is the one who signs the cheque and writes in the amount of money to be paid, as well as the name of the payee.

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The price of a commodity is determined by the interaction of demand and supply. When there is a high demand for a commodity and the supply is low, the price tends to increase. On the other hand, when the demand is low and the supply is high, the price tends to decrease. The point at which the demand and supply curves intersect is known as the equilibrium price, and this is the price at which the quantity of goods demanded is equal to the quantity of goods supplied. Therefore, it can be said that the price of a commodity is determined by the forces of demand and supply in the market.

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When the demand for a commodity is inelastic, the consumer bears the greater burden of the indirect tax. This is because when the demand for a product is inelastic, it means that the consumers are not very responsive to changes in price. Therefore, if the price of the product increases due to an indirect tax, the consumers will continue to buy the product despite the price increase, and the producer will not be significantly affected. The producer can, therefore, pass on most of the tax burden to the consumer by increasing the price of the product. As a result, the consumer pays more for the product, while the producer's profits remain relatively unchanged.

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The Nigerian indigenization decree was promulgated in 1972 with the aim of allowing indigenous Nigerians to have full participation in the economic activities of the country. The decree required foreign investors to sell at least 60% of their shares to Nigerians and allow them to participate in the management of the company. This was a way of empowering Nigerian citizens and reducing the economic dominance of foreigners in the country. The decree helped to create more job opportunities for Nigerians, promote local entrepreneurship, and encourage the growth of Nigerian-owned businesses. Overall, the indigenization decree was an important step towards economic independence and development in Nigeria.

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Price control refers to a government policy that sets a maximum or minimum price for certain goods or services in order to regulate the market. The government may choose to set price controls on goods that are considered essential or have a significant impact on the economy or society. This can include goods consumed by low-income earners, certain selected goods, and sometimes even luxury goods. Price controls on goods consumed by low-income earners are intended to make essential goods more affordable and accessible to the most vulnerable members of society. On the other hand, price controls on luxury goods may be used to discourage excessive consumption and reduce income inequality. Price controls can also be set on certain imported capital goods in order to protect domestic industries or to encourage the growth of domestic manufacturing. However, price controls on imported goods can also lead to reduced competition and potentially harm domestic consumers in the long term. Overall, price controls are a tool that governments can use to manage the economy and promote social welfare, but they can also have unintended consequences and drawbacks.

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The economic system in which most capital goods are owned by individuals and private firms is known as a capitalist economy. In a capitalist economy, the means of production are privately owned and operated for profit. The production of goods and services is determined by supply and demand in the market, and the price system is used to allocate resources and distribute output. This system is based on the principles of private property, individual initiative, and free enterprise, and is often associated with a market-oriented approach to economic development.

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The factor that does not affect revenue allocation in Nigeria is the number of industries and land areas. Revenue allocation is the process of distributing revenue generated by the federal government among the various tiers of government and the states in Nigeria. The revenue allocation formula is based on several factors such as population, landmass, revenue generation, and the development needs of the country. The needs of an area, size of the population of an area, revenue derivable from an area, and the development needs of the country are the factors that determine the revenue allocation in Nigeria. The number of industries and land areas is not a determining factor in revenue allocation in Nigeria.

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The economic problem refers to the challenge of allocating scarce resources among competing wants and needs. All the options listed are typical economic problems faced by any economic system. However, equal distribution of goods and services is not an economic problem in the sense that it is more of a social and political goal rather than a fundamental economic problem. While economic systems may strive to promote equality, ensuring equal distribution is not a problem that arises solely from the scarcity of resources. Therefore, the correct answer is "Equal distribution of goods and services."

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Rubber, Cocoa, Coffee, and Palm Kernel can be referred to as Nigeria's current export crops. These crops have been major foreign exchange earners for Nigeria in recent years. They are grown in different parts of the country, with cocoa and coffee mainly cultivated in the southern parts of the country, while rubber and palm kernel are predominantly grown in the central and eastern parts of Nigeria. These crops have a ready market in the international market, and their demand and prices have remained relatively stable, making them attractive for farmers and exporters alike. Other crops like groundnuts, beniseed, cotton, shear butter, sorghum, onions, sugarcane, soya beans, rice, and cashew nut are also grown in Nigeria but are not major export crops.

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The condition which adversely affects the expansion of production is the limited size of the market. When the market size is limited, it means that there is a small number of potential customers for the products produced. This limits the demand for the goods or services, which makes it difficult for the producers to increase their production levels. In such a scenario, even if the producer has enough funds, has effective management and the prospect of increased profits, they may still not be able to expand their production. This is because there is a limited demand for their products, which means that any increase in production will not be met with a corresponding increase in sales. As a result, the producer will be forced to operate below their potential capacity, which will adversely affect their ability to expand their business. Therefore, the limited size of the market is a major factor that can limit the growth and expansion of production.

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The major currency used for granting credits to member countries of the International Monetary Fund (IMF) is the US dollars. The US dollar is the most widely used currency in international transactions and is considered as the world's reserve currency. Since the IMF was established to promote international monetary cooperation and exchange rate stability, it uses the US dollar as its main currency for lending to member countries that are experiencing balance of payments difficulties. The IMF also has special drawing rights (SDRs), which is a supplementary reserve asset that is used in transactions among member countries and is based on a basket of major currencies including the US dollar.

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The imposition of high income tax by the government to cut down demand is known as Fiscal Policy. Fiscal policy is a tool used by the government to regulate the economy by adjusting government spending and taxation. In this case, the government is using taxation to reduce the disposable income of individuals and households, which will ultimately lead to a reduction in their demand for goods and services. This is done in order to control inflationary pressures in the economy and promote economic stability.

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If an increase in the price of commodity A leads to a decrease in the demand for commodity B, then A and B are complementary goods. Complementary goods are those that are typically consumed together. When the price of one of the goods goes up, it becomes more expensive to consume both goods, leading to a decrease in the demand for the other. For example, if the price of gasoline (commodity A) goes up, people may reduce their driving, leading to a decrease in the demand for cars (commodity B).

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The item that is not a capital expenditure is "Payment of interest on loans." Capital expenditure refers to expenses incurred for acquiring, improving, or extending a company's fixed assets, such as buildings, equipment, or land, that will be used for several years in the business. These expenditures usually involve significant outlays of cash and provide benefits to the company for an extended period. Building of roads and bridges, building of dams, building of harbours, and supply of electricity all involve the acquisition or improvement of significant fixed assets and thus fall under the category of capital expenditure. On the other hand, "Payment of interest on loans" is not an acquisition or improvement of any fixed asset, but it is a cost of borrowing money to finance the acquisition or improvement of fixed assets. Interest paid on loans is recorded as an expense in the income statement and not as a capital expenditure in the balance sheet.

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The advantage of price control is the ability of the government to regulate the prices of goods and services in order to make them more affordable and prevent exploitation of consumers. However, one disadvantage of price control is the distortion of the price mechanism. This means that prices are no longer determined by market forces, such as supply and demand, but rather by government intervention. This can lead to inefficiencies in the market, such as shortages or surpluses, and can also discourage innovation and competition. Therefore, the answer to the question is "Distortion of price mechanism."

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The equilibrium position of a firm is attained when the firm's Marginal Cost (MC) is equal to its Marginal Revenue (MR). Marginal Cost is the additional cost of producing one more unit of a good or service, while Marginal Revenue is the additional revenue generated from selling one more unit of a good or service. When the Marginal Cost of producing an additional unit of a good or service is equal to the Marginal Revenue generated from selling that additional unit, the firm is operating at its optimal level of output and has reached its equilibrium position. Therefore, option C, "when MC = MR," is the correct answer.

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The factor that does not cause a change in demand is the price of the commodity concerned. This is because the price of a commodity affects the quantity demanded but not the demand itself. Demand refers to the willingness and ability of consumers to buy a certain quantity of a commodity at a given price, while the price of the commodity is one of the determinants of the quantity demanded. When the price of a commodity increases, the quantity demanded decreases, and vice versa, but the demand itself remains unchanged. Therefore, a change in the price of a commodity would cause a movement along the demand curve, while the other factors such as income, taste and fashion, population, and price of other commodities, would cause a shift in the demand curve.

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The feature that is not associated with Sole Proprietorship is: "Decision can be taken only by ten people". Sole Proprietorship is a type of business ownership where a single individual is the owner of the business. The proprietor provides the capital to start the business and is in charge of managing the business. In Sole Proprietorship, there is unlimited liability, which means the owner is personally liable for the debts and obligations of the business. Continuity is also doubtful at the death of the proprietor since the business is not a separate legal entity. The proprietor has complete autonomy to make decisions regarding the business without any interference from others. Therefore, the statement that "Decision can be taken only by ten people" does not apply to Sole Proprietorship.

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External economies refer to the benefits that firms in a particular industry or location enjoy due to the presence of other firms in the same industry or location. Specifically, external economies occur when firms in an industry or location experience cost savings or increased efficiency as a result of factors outside of their control, such as a concentration of skilled labor, specialized suppliers, or infrastructure. Therefore, of the given options, external economies occur when firms compromising an industry are concentrated in one area.

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The option that does not relate to the law of comparative advantage is "In order to specialize, a country must have absolute advantage". Explanation: The law of comparative advantage states that countries should specialize in producing goods and services that they can produce at a lower opportunity cost than other countries. It does not require a country to have an absolute advantage in the production of any good or service. In fact, a country may have a comparative advantage in producing a good even if it is less efficient in producing that good than other countries. Therefore, the statement that "In order to specialize, a country must have absolute advantage" is incorrect as a country can specialize in producing goods and services based on their comparative advantage even if they don't have an absolute advantage.

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A demand schedule is a table showing the relationship between the price of a good and the quantity of that good that consumers are willing and able to buy. It lists the various prices of a good and the corresponding quantity demanded by consumers at each price. Essentially, it shows the demand curve for a particular product, which reflects the law of demand, stating that as the price of a good increases, the quantity demanded by consumers decreases, all other factors being equal. Therefore, a demand schedule is a useful tool for businesses to understand how changes in price affect the quantity of goods they can sell, and for economists to analyze consumer behavior and market trends.

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Subsistence farming means producing food mainly for the need of our immediate and extended family. In subsistence farming, farmers grow crops and rear animals to provide food for their families and immediate community. The farmers produce just enough to feed their families and do not have much left to sell. They may also engage in small-scale trading of their excess produce. The goal of subsistence farming is to provide food for the family and to meet basic needs, not for profit or export.

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International trade and domestic trade share many similarities, such as the exchange of goods and services and the involvement of transportation by land, water, and air. However, the main difference between the two is that international trade involves the exchange of goods and services between different countries that may have different currencies, while domestic trade involves the exchange of goods and services within a country using the same currency. This difference in currency can create unique challenges, such as currency exchange rates and trade restrictions, that do not exist in domestic trade. Additionally, international trade can also lead to increased specialization and consumption as countries focus on producing and exporting goods in which they have a comparative advantage.

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In economics, 'ends' refers to human wants or desires. These are the things that people seek to satisfy or fulfill through their economic activities. Human wants are unlimited, but the resources available to satisfy them are limited. Therefore, individuals have to make choices about which wants to satisfy with the limited resources available to them. Economics is the study of how people make these choices and allocate their scarce resources to satisfy their unlimited wants.

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The International Monetary Fund (IMF) would be classified as a Financial organization. This is because it is an international organization that is focused on promoting international monetary cooperation, exchange stability, and providing resources to help countries in need of financial assistance. The IMF provides financial assistance to member countries experiencing balance of payments problems and helps to promote economic growth and stability through policy advice, technical assistance, and training. The organization plays a crucial role in the global financial system and is considered one of the key institutions in international finance.

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(a) Liquidity ratio. The liquidity ratio (cash ratio) is the proportion of a commercial bank's total deposits that it keeps in liquid (readily available) form, that is, in cash and near-cash assets, rather than lending out. It is set to ensure the bank can always meet customers' withdrawal demands.

\[ \text{Liquidity ratio} = \frac{\text{Liquid (cash) assets}}{\text{Total deposits}}\times 100 \]

The central bank uses the required liquidity ratio as a tool of monetary policy: raising it reduces the funds banks can lend (tightening credit), while lowering it expands lending.

(b) Fixed deposits. A fixed (time) deposit is money placed with a bank for a fixed, agreed period (for example three or six months) that cannot normally be withdrawn until the period ends. Because the bank can rely on these funds, it pays a higher rate of interest than on current or savings accounts, and the longer the term, the higher the interest. Early withdrawal usually attracts a penalty or loss of interest.

(c) Money market. The money market is the market for short-term funds and financial instruments, that is, loans and securities that mature in a short time (generally under one year). Its instruments include treasury bills, certificates of deposit, commercial bills, and call money. The main participants are commercial banks, the central bank, discount houses, and large firms. It contrasts with the capital market, which deals in long-term funds such as shares and long-term bonds.

Examination takeaway. Keep the time dimension clear: the money market handles short-term finance and fixed deposits are time deposits, while the liquidity ratio is about keeping enough cash to meet withdrawals.

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(a) Malthus's views on population. Thomas Malthus, in his Essay on the Principle of Population, argued that:

• Population, if unchecked, tends to grow in a geometric progression (1, 2, 4, 8, 16...), that is, it doubles over regular periods.
• The food (means of subsistence) supply can at best grow only in an arithmetic progression (1, 2, 3, 4, 5...).
• Therefore population tends to outstrip the food supply, leading to a shortage of food and a falling standard of living.
• This imbalance is corrected by checks. Positive (natural) checks such as famine, disease, and war raise the death rate, while preventive (moral) checks such as late marriage and moral restraint lower the birth rate.

(b) Validity of these views for Nigeria today.

Points that support Malthus:

• Nigeria has a high population growth rate that has at times outpaced growth in food production, contributing to food shortages, importation of food, and unemployment.
• Poverty, pressure on land, and evidence of positive checks such as disease and communal conflict can still be observed.

Points that weaken Malthus:

• Modern improvements in agricultural technology (fertilisers, high-yield seeds, irrigation, mechanisation) have raised food output faster than Malthus assumed possible, so food need not grow only arithmetically.
• Family planning and education provide preventive checks Malthus underrated, helping to slow birth rates.
• Nigeria can import food and export other goods, and can develop industry, so it is not limited to its own farmland.
• A larger population also provides a bigger labour force and market that can aid development.

Conclusion. Malthus's warning about the danger of unchecked population growth outstripping resources is partly valid for Nigeria, but his theory is not fully borne out because technology, trade, and family planning have loosened the fixed relationship he assumed between population and food.

Examination takeaway. For a "how valid" question, give a balanced answer: state points for and against, then reach a reasoned conclusion rather than accepting or rejecting the theory outright.

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Concept. West African countries trade far more with Europe and America than with one another. The pattern is largely a legacy of colonial economic relationships and the structure of their economies.

Reasons why West African trade is directed to Europe and America rather than within Africa.

• Colonial ties. Historical links established under colonial rule created lasting trading relationships, currencies, and preferences oriented toward the former colonial powers.
• Similar products among West African states. Neighbouring countries produce similar primary goods (cocoa, groundnuts, timber, oil), so they compete rather than complement each other and have little to exchange.
• Demand for primary products abroad. Europe and America have large industries that need the raw materials and agricultural produce West Africa exports.
• Need for manufactured goods. West Africa lacks a strong industrial base and must import machinery, vehicles, and finished goods that only the developed economies produce.
• Poor transport links within the region. Roads, railways, and shipping lines were built to move goods to the coast for export overseas, not between African states, so intra-African trade is difficult.
• Currency and payment differences. Different, sometimes non-convertible currencies make trade between West African states harder than trade with hard-currency areas.
• Better credit, shipping, and marketing facilities exist for trade with Europe and America.
• Trade agreements and aid (for example associations with the European market) tie the region's trade to those partners.

Examination takeaway. Organise the reasons around structure (similar exports, need for manufactures) and history/infrastructure (colonial ties, transport, currency); this shows the examiner you understand both the economic and the historical causes.

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Concept. Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price. It is the percentage change in quantity demanded divided by the percentage change in price.

Given: Price rises from N5.00 (January) to N7.00 (February); quantity bought falls from 20 kg to 16 kg.

(a)(i) Percentage change in quantity bought.

\[ \%\Delta Q = \frac{16 - 20}{20}\times 100 = \frac{-4}{20}\times 100 = -20\% \]

(a)(ii) Percentage change in price.

\[ \%\Delta P = \frac{7 - 5}{5}\times 100 = \frac{2}{5}\times 100 = +40\% \]

(a)(iii) Coefficient of price elasticity of demand.

\[ e = \frac{\%\Delta Q}{\%\Delta P} = \frac{-20}{40} = -0.5 \]

Ignoring the negative sign (which merely reflects the inverse law of demand), the coefficient is 0.5.

(b)(i) Since the coefficient is less than 1, demand is inelastic.

(b)(ii) How we know. The proportionate change in quantity demanded (20%) is smaller than the proportionate change in price (40%). When the percentage change in quantity is less than the percentage change in price, giving a coefficient below 1, demand is price-inelastic: buyers are relatively unresponsive to the price change.

Examination takeaway. Always compare the two percentages: quantity changing by less than price means inelastic (e < 1); by more than price means elastic (e > 1); and the minus sign only signals the normal downward-sloping demand relationship.

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Concept. Industrialisation is the process of building up manufacturing and processing industries in an economy. Governments in developing countries deliberately encourage it to create jobs, add value to raw materials, diversify the economy, and reduce dependence on imports.

Measures the government has taken to encourage industrialisation in Nigeria.

• Provision of infrastructure. Building roads, ports, electricity, and water supply to lower the cost of doing business and support factories.
• Establishment of industrial estates and free trade zones. Setting aside serviced land and export-processing zones where industries can operate with facilities and incentives.
• Provision of finance. Setting up development banks and industrial funds (for example the Bank of Industry) to give loans to manufacturers.
• Tax incentives. Granting tax holidays, tariff concessions, and pioneer status to new and priority industries.
• Protection of infant industries. Imposing import tariffs, quotas, or bans on competing foreign goods to shield local firms.
• Import-substitution and local-content policies. Encouraging local production of goods formerly imported and requiring the use of local raw materials.
• Manpower development. Establishing technical colleges and training institutions to supply skilled labour.
• Indigenisation and privatisation policies. Transferring ownership to Nigerians and improving efficiency of state enterprises.

Examination takeaway. Group the measures into fiscal (taxes and incentives), monetary/financial (loans and development banks), and protective/infrastructural policies; explaining how each measure promotes industry earns more than a bare list.

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(a) Objectives of OPEC (Organisation of the Petroleum Exporting Countries).

• To co-ordinate and unify the petroleum policies of member countries.
• To stabilise oil prices in the international market and avoid harmful fluctuations.
• To secure a fair and stable income for the producing (member) nations.
• To ensure a regular and efficient supply of petroleum to consuming nations.
• To secure a fair return on capital for those investing in the petroleum industry.
• To protect members from exploitation by the large international oil companies and give them collective bargaining strength.

(b) Problems of OPEC.

• Disagreement over production quotas. Members dispute how much each may produce, weakening price control.
• Cheating and over-production. Some members exceed their quotas and sell secretly, undermining agreed prices.
• Competition from non-OPEC producers. Oil from non-member countries reduces OPEC's control of the market.
• Political differences and conflict among members (including wars) make co-operation difficult.
• Availability of substitutes. Development of other energy sources reduces demand for OPEC oil.
• Differences in economic needs. Members with large populations want higher output and revenue, conflicting with price-support cuts.

(c) Remedies adopted to curtail the problems.

• Fixing and enforcing production quotas for each member to control total supply.
• Regular meetings of members to agree and review output and prices.
• Monitoring of members' output to discourage cheating.
• Adjusting prices and production in response to market conditions to defend price levels.
• Encouraging co-operation and dialogue to resolve political differences and present a united front.

Examination takeaway. Match the remedies to the problems: quotas and monitoring answer over-production, while regular meetings and dialogue answer disagreement, so the three parts of the answer should read as a connected chain.

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Concept. National income figures (such as GDP, GNP/GNI, and per capita income) are statistical estimates of the total value of goods and services an economy produces. Once compiled, they serve several important purposes.

Uses of national income figures.

• Measuring economic performance and growth. Comparing national income from year to year shows whether the economy is expanding, stagnant, or contracting.
• Indicating the standard of living. Per capita income (national income divided by population) gives a rough measure of average welfare in the country.
• International comparison. Figures allow the wealth and living standards of different countries to be compared.
• Aid to economic planning. Government uses the data to allocate resources, set targets, and prepare development plans and budgets.
• Showing the structure of the economy. Sector contributions (agriculture, industry, services) reveal on what the economy depends.
• Measuring income distribution. The figures help reveal how income is shared among groups and regions, guiding policies to reduce inequality.
• Assessing the effect of government policy. Changes in the figures show whether fiscal and monetary policies are achieving their aims.
• Basis for international obligations. Contributions to and grants from international bodies are often based on national income.

Note on limitations. The figures should be used with care because they ignore non-market activities, do not show income distribution directly, and are affected by price changes; real (not just money) figures and per capita measures give a truer picture.

Examination takeaway. Where the question simply says "explain the uses," give several distinct uses, each named and briefly explained, rather than one use discussed at length.

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Concept. Agriculture is the cultivation of crops and rearing of animals. In most West African economies it is the largest sector, and it plays several vital roles in national development.

Roles of agriculture in the economy.

• Provision of food. Agriculture feeds the population, ensuring food security and reducing dependence on imported food.
• Employment. It provides work and income for a large proportion of the population, especially in rural areas.
• Source of raw materials. It supplies inputs (cotton, palm oil, cocoa, hides) to agro-based industries, promoting industrialisation.
• Source of foreign exchange. Exports of cash crops earn foreign currency used to import capital goods.
• Source of government revenue. Taxes, export duties, and marketing-board earnings from agriculture add to public funds.
• Provision of capital for development. Savings and surpluses generated in agriculture can be invested in other sectors.
• Market for industrial goods. Farmers buy tools, fertilisers, and consumer goods, creating demand that supports industry.
• Contribution to national income (GDP). Agriculture accounts for a large share of total output.

Examination takeaway. Present each role as a distinct point with a short explanation; grouping them (food, employment, income, foreign exchange, raw materials, revenue) helps you produce the number of well-developed points the marks require.

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(a) Demand-pull inflation. Demand-pull inflation is a persistent rise in the general price level caused by aggregate (total) demand for goods and services growing faster than the economy's ability to supply them. Because "too much money chases too few goods," the excess demand pulls prices up. It arises from factors such as rising government spending, increased money supply, higher consumer spending, or export booms while output is near full capacity.

(b) Why price control is not suitable for checking demand-pull inflation.

• It attacks the symptom, not the cause. The root problem is excess demand relative to supply; fixing maximum prices does nothing to reduce that excess demand.
• It creates shortages. A price ceiling set below the equilibrium price leaves quantity demanded greater than quantity supplied, so goods disappear from the shelves.
• It breeds a black market. Scarce goods are diverted and sold illegally at prices even higher than before, so the true cost to consumers rises.
• It discourages production. Controlled prices reduce producers' profit incentive, cutting supply further and worsening the underlying imbalance.
• It is difficult and costly to enforce across many goods, leading to hoarding, rationing, and corruption.

The appropriate remedies instead reduce aggregate demand: contractionary monetary policy (raising interest rates, reducing the money supply) and contractionary fiscal policy (cutting government spending or raising taxes).

Examination takeaway. A correct policy must address the cause of the inflation; since demand-pull inflation comes from excess demand, only demand-reducing (deflationary) policies are appropriate, not price fixing.