QUESTION 83 (6 marks)
During a construction boom, the central bank raises the cash rate while the government begins a large untargeted building package. Explain why the policies may work against each other and why their effects will not necessarily cancel exactly.
Practice marking scheme
Answer
Monetary demand restraint may be offset by fiscal construction demand, with unequal lags and incidence.
Working
Higher rates tend to reduce interest-sensitive consumption and investment. Public construction adds G and demand for already scarce inputs, potentially increasing cost pressure. The instruments differ in size, financing, timing and sectors affected. One cannot infer an exact net effect by comparing their labels alone; coordinated staging or a capacity-focused design may reduce the conflict.
Marking criteria
- Explains each policy’s demand mechanism. [2 marks]
- Explains the capacity/inflation conflict. [2 marks]
- Explains why effects do not mechanically cancel. [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.