QUESTION 70 (6 marks)
The forecast assumes the cash rate is held at its current level. Use it to evaluate the argument that inflation above 3% today requires an immediate additional rate rise. Consider one reason the forecast could be wrong.
Practice marking scheme
Answer
An additional rise is not justified by current inflation alone; the forecast returns to the target range.
Working
Inflation is 5% now but is projected to fall to 2.9% in Year 3 and 2.6% in Year 4 under unchanged settings. Previous tightening may still be transmitting. Extra tightening could weaken employment or push later inflation too low. However, renewed supply shocks or persistent expectations could invalidate the forecast. A defensible decision should weigh the forecast, uncertainty and both objectives.
Marking criteria
- Uses two relevant forecast values accurately. [2 marks]
- Explains forward-looking policy and transmission lags. [2 marks]
- Evaluates the additional-rise claim, including forecast risk. [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.