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Inflation and Monetary Policy

Inflation remains an issue in the UK economy as it stays stubbornly above the Bank of England's target rate, despite the economic slowdown.  Here are the kind of questions you should be able to answer as an economist:

Read the following article:

1.  Identify three points of interest in the graph.

2.  Explain what is meant by inflation and why it is regarded as a 'bad' thing for an economy.

3.  Using the article identify two main contributors to inflation and, with the use of a graph, explain what is meant by cost-push inflation.

4.  Explain the process by which monetary policy can be used to reduce inflation.

5.  Evaluate the extent to which the use of a 'tighter' monetary policy would be an effective way of reducing inflation in the current economic climate. Conclude with justified recommendations for the Monetary Policy Committee.