Question 20N.1.SL.TZ0.b
| Date | November 2020 | Marks available | [Maximum mark: 15] | Reference code | 20N.1.SL.TZ0.b |
| Level | SL | Paper | 1 | Time zone | TZ0 |
| Command term | Evaluate | Question number | b | Adapted from | N/A |
Evaluate the view that a decrease in aggregate demand would always be deflationary.
[15]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definitions of aggregate demand, deflationary
- diagram to show a fall in AD leading to a fall in the average price level in the neo classical/monetarist model
- explanation that in the neo classical/monetarist model a fall in AD would be deflationary because a fall in AD leads to a new equilibrium income at a lower average price level and real GDP
- examples of economies that have experienced a decrease in AD, which is deflationary
- synthesis or evaluation.
Evaluation may include: When AD falls in the Keynesian model and the economy is below full employment the average price level does not fall because wages and costs tend not to fall.
NB Candidates can approach this question in terms of deflationary conditions in the economy or as deflation.
This question proved to be quite challenging for students because the term "deflationary" can be answered as falling prices or falling output when there is a deflationary gap. Most candidates chose to focus on falling prices and there were some very good answers to this with students focusing on the Keynesian AS where falling aggregate demand will cause deflation if output is at or near full employment. When, however, output is below full employment, falling aggregate demand will not cause deflation because wages are 'sticky' downwards. Some students were drawn onto the Neo-classical LRAS which has another approach that could be used effectively to explain how falling aggregate demand will always cause deflation. Some students used real world examples here, but many found it difficult to build one into their answer.
