QUESTION 40 (6 marks)
Flood damage closes a major freight route and raises delivery costs across many industries. Explain the short-run effects using a labelled AD/AS diagram. Distinguish this event from demand-pull inflation.
Practice marking scheme
Answer
SRAS shifts left/up: real GDP falls and the price level rises; this is a cost-push supply shock.
Working
Higher transport costs reduce profitable output at each price level. Hold AD fixed and shift SRAS left/up. The new equilibrium has less real output and a higher price level, creating a growth–price stability trade-off. Demand-pull pressure would originate in stronger AD, whereas this scenario starts with disrupted supply.
Marking criteria
- Explains the production-cost mechanism. [2 marks]
- Draws an accurate labelled left/up SRAS shift. [2 marks]
- Identifies lower output and a higher price level. [1 mark]
- Distinguishes cost-push from demand-pull pressure. [1 mark]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.