QUESTION 67 (5 marks)
A temporary energy-price jump is followed by widespread expectations that inflation will remain high. Explain why the central bank may be more concerned about the expectations shift than about the one-off price jump alone.
Practice marking scheme
Answer
Unanchored expectations can create persistent demand and wage/price-setting pressure.
Working
A one-off energy increase raises the price level and temporarily annual inflation. If households bring purchases forward and businesses/workers incorporate higher future inflation into price and wage decisions, pressure can persist after energy supply recovers. A credible policy response may anchor expectations, but aggressive tightening also risks lower output and employment. Persistence and the forecast, not just the current spike, matter.
Marking criteria
- Distinguishes a one-off level shock from persistent expectations. [2 marks]
- Explains a behavioural transmission mechanism. [2 marks]
- Identifies the policy trade-off. [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.