2 4Extract C (lines 9-10) states that In the eurozone, interest rates were recentlyreduced due to concern about the possibility of deflation.Draw an AD/AS diagram to illustrate how a fall in interest rates might help to avoiddeflation.

N CO e Extract C: Is a rise in inflation inevitable? ve The recovery in the UK economy has been fairly weak and yet inflation has only just returned to the Government's target of 2.0%, having been way above it for the past four years. Above-target inflation has been blamed on rising world commodity prices, increases in Valued Added Tax (VAT) and the fall in the exchange rate. According to the Bank of England these are temporary factors. However, if inflation is above target when 5 the recovery is weak, unemployment is high and there is plenty of spare capacity in the economy, what will happen when the pace of the recovery quickens? Is a further rise in inflation inevitable? At present, wages are only increasing slowly and there is little evidence to suggest that people expect inflation to rise. In the eurozone area, interest rates were recently reduced due to concern about the possibility of deflation. 10 When the recovery properly takes hold, it is likely to be accompanied by an increase in investment and, subsequently, by a rise in the rate of growth of labour productivity. An increase in the productivity of labour will help to offset the inflationary impact of any increase in wages, so perhaps the UK should consider the possibility of deflation too. 15 Source: News Reports, February 2014