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Economics Paper 2, Nov/Dec. 2009  
Questions: 1 2 3 4 5 6 7 8 9 10 11 12 Main
General Comments
Weakness/Remedies
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Question 8


(a)   What is inflation? 

 (b)Describe the effects of inflation on any three functions performed by money.


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Observation

Candidates were able to define and also identify the functions of money but most candidates could not describe the effects of inflation on these functions.  However, to score high marks, candidates were expected to answer this question as follows:

(a)  Inflation can be described as the persistent rise in the general price level of goods and services.
       (b) (i)    Medium of exchange – value of money falls during inflation. People therefore lose confidence in it and prefer other things as medium of  exchange        
(ii)  Measure of value – when money persistently loses its value, it ceases to be a good standard for measuring the value of other commodities.
(iii)    Store of value – During inflation, savings continually fall in value.  People do not therefore want to store their wealth in money but in goods.

(iv) Standard for deferred payments – Creditors are less keen to accept a promise to pay in money that is continually losing its value.  Credit transactions become more difficult.


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