With the help of a diagram, assess the effectiveness of government policies which might be used to reduce cost-push inflation.

With the help of a diagram, assess the effectiveness of government policies which might be used to reduce cost push inflation.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and \(A O 2\) out of 14 marks. AO 3 out of 6 marks.
Indicative content
AO1 Knowledge and understanding and AO2 Analysis
- A clear outline of different causes inflation and why inflation might cause problems.
- A more detailed explanation of the causes of cost push inflation, supported by an accurately labelled diagram
- A description of alternative policies that a government might use to reduce cost push inflation
- Analysis can be used to show how a government will be able to increase aggregate supply, in the long term, by increasing productivity through direct investment. For example, by increasing expenditure on education/infrastructure. This analysis might also be supported by a relevant diagram
- In the short term, a government might focus on attempting to reduce the cost of producing goods and services by introducing widespread subsidies, reducing indirect taxation, removing tariffs on key imports or the use of incomes policies.

L2 maximum if no accurate diagram provided
Must refer to some supply side polices to gain L3 marks

AO3 Evaluation
Increasing the use of subsidies and/or decreasing the use of indirect taxation is likely to have a negative effect on a government's budget. For example, increasing the budget deficit and subsequently increasing the need for more government borrowing.

Removing tariffs is likely to have a negative effect on the incomes and output of domestic producers and possibly lead to an increase in unemployment

The introduction of incomes policies is likely to lead to opposition from trade Unions and the possibility of industrial disruption.

Long run supply-side policies are likely to focus on attempts to increase productivity. This frequently involves significant investment in new technology which will lead to a rise in unemployment in the short run

Other policies which might be used in the long run might include immediate investment in skills training and improving the quality of the infrastructure. Skills training is expensive and hence has a high initial opportunity cost. While the immediate effect of an increase in expenditure on improving the infrastructure is likely to increase aggregate demand and add to the inflationary pressure

A conclusion should attempt to assess the relative effectiveness of each type of policy approach and consider which approach is likely to be the most effective in the short run and then compare this with possible outcomes that might be achieved in the long run.

Accept evaluation relating to demand side policies.