This question also attracted few of the candidates, most of whom scored above average marks. Candidates were expected to define inflation in the (a) part and to explain some positive effects of inflation and some effects of deflation in the (b) and (c) parts of the question respectively. The candidates that attempted this question were able to define inflation but majority of them had a poor understanding of the effects of inflation in the (b) and (c) parts of the question, hence their performance was a bit below average.

The candidates were expected to answer thus:

1. Inflation is defined as a sustained increase in the general price level in an economy over a period of time.


2. 1. Increase in profits made by businessmen as a result of rising prices of goods and services.
   
   
   2. Increase in employment opportunities as a result of increase in profits and investment.
   
   
   3. It reduces the burden of national debt since the real value of money borrowed falls during inflation.
   
   
   4. Increase in investment as a result of increased profit made by businessmen.
   
   
   5. Borrowers gain as the real value of the money falls making easier for them to repay their debts.
   
   
3. 1. A fall in prices reduces the profit margin of the producers.
   
   
   2. Deflation discourages investment as a result of falling prices and profits.
   
   
   3. Unemployment may increase as a result of fall in investment.
   
   
   4. Lenders gain at the expense of the borrowers as a result of an increase in the value of money.
   
   
   5. People on fixed income such as salary earners and pensioners gain as a result of increase in their real incomes.
   
   
   6. Deflation has a favourable effect on balance of payments as falling prices make export relatively cheaper and imports more expensive.