QUESTION 41 (5 marks)
A transport innovation lowers production costs while a consumer-confidence shock reduces spending. Both shifts occur before prices adjust. Explain what can and cannot be predicted about real GDP and the price level without knowing the relative shift sizes.
Practice marking scheme
Answer
The price level falls; the real-GDP effect is ambiguous.
Working
Lower costs shift SRAS right/down, reducing the price level and increasing output. Lower consumption shifts AD left, reducing both the price level and output. The price effects reinforce one another. The output effects oppose one another, so the relative sizes determine whether real GDP rises or falls. This does not establish a permanent deflation rate.
Marking criteria
- Identifies both shifts and their individual effects. [2 marks]
- Concludes that the price level falls. [1 mark]
- Explains why real output is indeterminate. [2 marks]
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.