Deflation in Elaria

Read the extracts and answer the questions that follow.

Text A — Falling demand

1. Following a banking crisis, households and firms reduced spending. Real output contracted, unemployment increased and the average price level fell for two consecutive years. Elaria is therefore experiencing deflation.

2. Consumers expect prices of cars and household appliances to fall further and are delaying purchases. Businesses face falling revenue and have reduced investment and employment.

Text B — Debt and recovery

1. Many households hold fixed nominal mortgages. Falling wages and prices have increased the real burden of these debts, contributing to bankruptcies. The central bank has cut interest rates close to zero, but pessimistic firms remain unwilling to borrow.

2. The government is considering temporary public investment and household tax reductions. Some economists instead favour productivity-enhancing measures that could increase short-run aggregate supply. They emphasize that disinflation should not be confused with deflation.

Table 1 — CPI and real GDP

Elaria's CPI and real GDP, 2024–2025.

Table 2 — Employment data

Elaria employment data, 2025.

Growth, equity and the environment in Faron

Read the extracts and answer the questions that follow.

Text A — Mineral-led growth

1. New copper mines and processing plants have increased Faron's exports, investment and employment. The economy has recorded rapid long-term economic growth as new capital and technology have expanded productive capacity.

2. Most mines are owned by a small number of domestic and foreign companies. Profits and high-skilled wages have increased rapidly, while incomes in rural farming regions have changed little. Housing costs in mining towns have also risen.

Text B — Choosing a growth strategy

1. Mining has caused water contamination, deforestation and carbon emissions. The government is considering pollution taxes and investment in renewable energy. It also plans to use mining-tax revenue to finance rural schools, healthcare and transport.

2. Supporters argue that these policies could create inclusive growth, while critics fear that stricter environmental policies may slow output and employment growth in the short run.

Table 1 — Real GDP and population

Faron's real GDP and population, 2023 and 2025.

Table 2 — Income distribution

Annual household income by income group in Faron.

Inflation and unemployment in Galenia

Read the extracts and answer the questions that follow.

Text A — Recession and recovery

1. Galenia entered a recession after household confidence and investment declined. Real output fell below potential output and cyclical unemployment increased. The government responded with temporary spending on public transport and tax reductions.

2. Aggregate demand has begun to recover, but inflation has also increased. The central bank is considering contractionary policy even though unemployment remains above its pre-recession rate.

Text B — Supply constraints

1. Galenia also imports most of its natural gas. A rise in global gas prices has increased firms' costs, causing inflation while reducing output. This has complicated the choice between price stability and employment.

2. The government plans vocational training and energy-efficiency investment. These measures may reduce structural unemployment and expand productive capacity, potentially easing the conflict between low unemployment and price stability.

Table 1 — Labour-market data

Galenia labour-market data

Table 2 — CPI data

Galenia consumer price index data

Actual and potential growth in Hespera

Read the extracts and answer the questions that follow.

Text A — Recovery from recession

1. Hespera's real output fell substantially during a recession. As consumer confidence recovered, firms rehired workers and reopened idle factories. This produced actual growth without immediately changing the economy's maximum sustainable output.

2. Unemployment has fallen, but some workers have stopped seeking employment and are not included in official unemployment data. Others work fewer hours than they would prefer.

Text B — Capacity and inflation

1. Hespera is investing in technical education, digital infrastructure and modern machinery. Economists expect these policies to increase potential output over time.

2. The central bank is concerned that continued demand growth may become inflationary as spare capacity disappears. Business groups argue that supply-side improvements will permit non-inflationary growth.

Table 1 — Real GDP

Hespera's real GDP, 2023–2025.

Table 2 — Labour-market data

Hespera labour-market data, 2025.

Measuring inflation in Ilyria

Read the extracts and answer the questions that follow.

Text A — The official index

1. Ilyria's statistics agency calculates a consumer price index from a fixed representative basket. Food prices have risen rapidly, while electronics prices have fallen as product quality has improved.

2. Low-income households spend a greater proportion of income on food and rent than the official representative household. Consumers have also substituted toward cheaper products, but the basket's expenditure weights have not been revised for six years.

Text B — Economic effects

1. Workers seek wage increases based on the official inflation rate. Some firms have increased prices to cover wage and energy costs, while exporters report weaker competitiveness.

2. The central bank wants to maintain a low and stable rate of inflation. It is considering higher interest rates, although business investment and economic growth have already slowed.

Table 1 — CPI data

Ilyria consumer price index, base year = 100

Table 2 — Household income and expenditure

Low-income household monthly income and cost of its fixed basket in Ilyria.

Persistent unemployment in Jorvik

Read the extracts and answer the questions that follow.

Text A — Different causes

1. Jorvik's coastal resorts employ many workers only during the summer, creating seasonal unemployment each winter. New entrants to the labour force also require time to find suitable jobs.

2. In the northern region, coal mines have permanently closed. Vacancies are available in healthcare and renewable energy, but former miners often lack the required qualifications or live far from the new jobs.

Text B — Hidden unemployment and costs

1. Some jobless people have stopped searching and are classified as discouraged workers. Many employed workers also want additional hours. Official data may therefore understate unused labour.

2. Long-term unemployment has reduced household income and tax revenue while increasing benefit expenditure. The government is considering retraining, relocation support and temporary aggregate-demand stimulus.

Table 1 — Official labour-market data

Official labour-market data for Jorvik.

Table 2 — Unemployment by type

Officially unemployed people in Jorvik by unemployment type.

Competing sources of inflation in Lunara

Read the extracts and answer the questions that follow.

Text A — Demand conditions

1. Lunara's government increased spending while consumer confidence strengthened. Aggregate demand rose quickly, unemployment fell and the economy approached full-employment output. The central bank initially regarded the resulting inflation as temporary.

2. Wage settlements then began to reflect expectations of further price increases. Firms raised prices to cover higher wage costs, making inflation more persistent.

Text B — An external supply shock

1. A drought reduced domestic food output, while imported oil became more expensive. These shocks caused cost-push inflation and reduced real output.

2. Some economists recommend contractionary demand policy. Others argue that this would worsen unemployment and that agricultural productivity, energy diversification and credible communication are preferable. The debate depends partly on whether inflation expectations remain anchored.

Table 1 — CPI and output

Lunara's CPI and real GDP, 2024–2025

Table 2 — Labour-market data

Lunara labour-market data, 2025

Growth and inflation in Arandia

Arandia experienced a rapid recovery following a recession. Investment and consumer confidence increased, but shortages of skilled labour and transport capacity have emerged. The central bank is concerned that aggregate demand is growing faster than productive capacity.

The government wishes to raise living standards through economic growth while maintaining a low and stable rate of inflation. It is considering expenditure on vocational education and transport infrastructure, although this would require additional borrowing.

Table 1: Consumer prices and quantities in Arandia

Fixed consumer basket and prices in Arandia

Table 2: Selected macroeconomic data

Selected macroeconomic data for Arandia, 2023–2024.

Unemployment and inflation in Belvaria

Belvaria's economy recovered rapidly after a period of weak aggregate demand. However, the official unemployment rate may understate the amount of unused labour because many people have stopped searching for work or cannot obtain as many hours of work as they want.

The central bank is considering a further reduction in interest rates. Some economists argue that this would reduce cyclical unemployment, while others warn that further demand expansion could mainly increase inflation, particularly given the pattern in Table 2.

Table 1 reports current labour-market data at the time of the policy decision, after the period shown in Table 2. Table 2 reports annual inflation and unemployment rates from 2022 to 2024.

Table 1: Labour-market data for Belvaria

Current labour-market data for Belvaria after 2024

Table 2: Inflation and unemployment

Annual inflation and unemployment rates in Belvaria.

Government debt in Cordinia

Cordinia borrowed heavily during a recession to finance income support and a national rail project. The rail project is expected to reduce transport costs and increase productive capacity, but higher world interest rates have raised the cost of servicing government debt.

A credit-rating agency has warned that continued budget deficits may lower Cordinia's credit rating. The government is considering either immediate spending cuts or a gradual fiscal adjustment combined with reforms intended to increase long-term growth.

Table 1: Government finance and national income

Government finance and national income in Cordinia

Table 2: Selected government expenditure categories

Selected Cordinia government expenditure categories, 2024.

Deflation in Deltora

Deltora has experienced falling consumption and investment. Households expect prices to decline further and are postponing purchases of durable goods. Firms report falling nominal revenue, while bankruptcies and cyclical unemployment are increasing.

The central bank's policy interest rate is 0.25%, and commercial banks remain reluctant to lend. The government is considering temporary public investment and transfers to low-income households.

Table 1: Price-level and labour-market data

Price-level and labour-market data for Deltora, 2023–2024.

Table 2: Household debt

Household debt and consumer price index data for Deltora.

Growth, equity and environmental sustainability in Estavia

Estavia's output has grown because of expanding mining and renewable-energy industries. Mining creates export revenue but causes water pollution and carbon emissions. Renewable-energy firms employ highly skilled workers, while many rural workers lack the qualifications required for new jobs.

The government is considering a carbon tax. It proposes using the revenue to finance rural education, worker retraining and clean public transport. Business groups warn that the tax could raise costs and weaken export competitiveness.

Table 1: Growth and environmental indicators

Estavia's growth and environmental indicators, 2023–2024.

Table 2: Income-distribution indicators

Income-distribution indicators for Estavia, 2023–2024.

Macroeconomic conflicts in Kalmora

Read the extracts and answer the questions that follow.

Text A — Demand-led expansion

1. Kalmora's economy has expanded rapidly because of rising consumption, investment and government expenditure. Unemployment has fallen, but firms operating near full capacity report labour and component shortages. Demand-pull inflation is accelerating.

2. The government values continued growth because it raises employment and tax revenue. However, low-income households whose wages adjust slowly have experienced declining purchasing power.

Text B — Distribution and sustainability

1. Most new investment has occurred in capital-intensive urban industries. Owners of capital and highly skilled workers have gained more than rural and low-skilled households, creating concern about equity in income distribution.

2. Electricity generation remains dependent on coal. The government is considering renewable-energy investment, worker training and tighter monetary policy. These policies may affect growth, inflation, unemployment, equity and environmental sustainability differently over time.

Table 1 — Output and prices

Kalmora's output and consumer price index, 2024–2025.

Table 2 — Labour-market data

Kalmora labour-market data, 2025.

Choosing macroeconomic priorities in Montara

Read the extracts and answer the questions that follow.

Text A — Uneven recovery

1. Montara's economy is recovering from a prolonged downturn. Real GDP has risen, but many young people remain unemployed for long periods. Employers report that some applicants lack the qualifications required in expanding industries.

2. The unemployment rate excludes people who have stopped searching and does not reveal underemployment among part-time workers. The government argues that labour-market weakness is therefore greater than the headline figure suggests.

Text B — Inflation and policy

1. Food and transport prices have risen following crop failures and higher imported fuel costs. Inflation is reducing the purchasing power of fixed-income households. The central bank nevertheless fears that raising interest rates could weaken the recovery.

2. The government proposes targeted training, public transport investment and temporary income support. It aims to achieve macroeconomic stability, including sustainable growth, low unemployment and a low and stable inflation rate.

Table 1 — Output and prices

Table 1: Montara's output and prices

Table 2 — Labour-market indicators

Montara's labour-market indicators

Cost-push inflation and unemployment in Faron

Faron imports most of its energy. A sharp increase in world energy prices has raised firms' production and transport costs. Inflation and unemployment have risen together, while real output has fallen. Wage agreements are negotiated annually, and workers are seeking increases in nominal wages to recover lost purchasing power.

The central bank is considering a large increase in interest rates. The government is instead considering temporary energy-efficiency grants for firms and targeted income support for low-income households.

Table 1: Weighted consumer basket

Faron weighted consumer basket, with 2023 as the base year.

Table 2: Macroeconomic and wage data

Faron macroeconomic and wage data, 2023–2024.