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IGCSEEconomicsCambridge (CIE)Revision Notes4. Government & the Macroeconomy4.7 InflationPolicies to Control Inflation

Syllabus Edition

First teaching 2025

First exams 2027

Policies to Control Inflation (Cambridge (CIE) IGCSE Economics): Revision Note

Exam code: 0455 & 0987

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

Policies to manage inflation

  • Demand-pull inflation is best addressed using contractionary demand-side policies

    • Contractionary fiscal policy and contractionary monetary policy aim to reduce total (aggregate) demand in an economy

    • If total demand for goods and services decreases, there will be a fall in the general price level, thereby reducing the level of inflation

  • Total demand can be decreased through any policy which decreases one of the components of real gross domestic product (rGDP)

Examples of demand-side policies used to reduce demand-pull inflation

Broad policy type

Specific policy

Explanation

Contractionary fiscal policy

  • The government increases corporation tax

  • Firms pay more tax → firms have less profit → firms invest less → rGDP falls → inflation decreases

Contractionary fiscal policy

  • The government decreases expenditure on national defence

  • Government spending decreases → defence firms receive fewer orders from the government → national output falls → inflation decreases

Contractionary fiscal policy

  • The government increases personal income tax

  • Households have less discretionary income → consumption decreases → national output falls → inflation decreases

Contractionary monetary policy

  • The Central Bank increases interest rates

  • Household repayments on existing loans rise → households have less discretionary income → consumption decreases → national output falls → inflation decreases

Contractionary monetary policy

  • The Central Bank decreases the money supply by stopping quantitative easing

  • Firms receive less money from the sale of bonds → investment decreases → national output falls → inflation decreases

The effectiveness of demand-side policies

  • Demand-side policies are more effective in the short term at dealing with inflation caused by a rise in total (aggregate) demand

  • They are less effective at dealing with cost-push inflation

  • One conflict caused by contractionary policy is that reducing demand-pull inflation also reduces output and employment

    • This could increase unemployment 

Examples of supply-side policies used to reduce cost-push inflation

Specific supply-side policy

Explanation

The government reduces regulation on the oil and banking industries

  • Regulations removed → costs of production decrease as firms no longer need to spend money meeting requirements → national output (total supply) rises → inflation reduces

The government changes migration policies to allow more workers into the country

  • More workers move into the country → the price of labour (wages) falls → costs of production reduce for firms → national output (total supply) rises → inflation reduces

The government builds a new rail network serving ports and airports

  • Speed and capacity of transport infrastructure is improved → costs of production decrease as firms benefit from the improvements → national output (total supply) rises → inflation reduces

 The effectiveness of supply-side policies

  • Supply-side policy tends to be long-term and is highly effective in reducing price levels in the long run

  • They do not help deal with inflation caused by demand-side issues

    • Not useful for short-term inflation – if prices are rising quickly due to demand-side pressures (e.g., after a stimulus), supply-side policies are too slow to help

  • They can be expensive to implement – as they can require high government spending in the short term (e.g. for investment or subsidies)

Examiner Tips and Tricks

When answering questions on inflation, say that supply-side policies help reduce inflation in the long run, but they are not a quick fix. For short-term inflation, monetary policy is usually more effective

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    Author
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    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.