QUESTION 84 (5 marks)
A model’s equilibrium price-level index falls from 120 to 116 after a positive supply shift. Explain what the model says about the price level. Does this single comparative-static diagram establish a continuing deflation rate? Justify your answer.
Practice marking scheme
Answer
The new price-level index is 3.33% lower; a permanent deflation path is not established.
Working
(116 − 120)/120 × 100 = −3.3333%. The diagram compares two equilibrium levels, holding other specified conditions fixed. It does not give a sequence of prices over many periods. A measured fall over a defined period is deflation for that period, but future inflation requires information about later demand, supply and expectations.
Marking criteria
- Calculates the 3.33% decline. [1 mark]
- Distinguishes equilibrium levels from a time-series rate. [2 marks]
- Makes a justified statement about future inflation. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
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