QUESTION 13 (7 marks)
Assume the following is a scenario experienced by Australia. The Organisation for Economic Co-operation and Development (OECD) has confirmed that the current Australian high inflation scenario is unlike those in the past. Health and natural disasters, plus disruptions due to international political events, have restricted the global supply chain. Further, companies have posted greater profits during this uncertain period. Increases in labour costs account for just 10% of the inflation above what the central bank wants to see before it eases interest rate increases. Interpret the inflation pressures and explain why the Reserve Bank of Australia may not be able to effectively manage this scenario.
QCAA guide · typeset solution
QCAA sample response and mark allocation
Question 13 (7 marks)
Sample response | The response: |
The scenario is a supply-side shock resulting in cost-push inflation. Here, a range of forces (e.g. natural disasters) are acting to reduce AS in the economy, impacting the supply chain. These forces increase the costs faced by businesses who react by increasing prices to maintain their profit margins where they can, leading to more supply-side inflation. Notably, labour costs (a demand factor) are not significantly impacting inflation. In cost-push inflation, cash rate increases raise prices further as interest rates are another cost to business. This inflation would reduce household demand, which is falling due to both less disposable income and reduced buying power. Therefore, the RBA cannot be as effective at managing cost-push inflation compared to demand-pull inflation. | Analysis (4 marks) |
[1 mark] • identifies the scenario as cost-push inflation | |
• describes the disasters and disruptions as reducing aggregate supply [1 mark] | |
• identifies that businesses pass on rising costs as higher prices [1 mark] | |
• identifies that wages are not a major contributor to inflation [1 mark] | |
Conclusion (3 marks) | |
[1 mark] • explains that cash rate rises add to inflation pressures | |
[1 mark] • explains that D pressures are absent | |
• describes that the RBA is not as effective at managing cost-push inflation [1 mark] |
QCAA sample response and marking criteria reproduced from the official guide.
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