Economic management — Question 91

Answer
Targeted repair is the stronger main response on the supplied forecasts; temporary targeted household relief and careful monetary restraint may complement it.

Working
Source 2 identifies a supply bottleneck, so simply increasing spending does not repair the cause. In Source 1, repair raises growth 1.0 percentage point above baseline while reducing inflation 0.9 point; the rebate raises growth 0.7 point but adds 0.8 point to inflation. At equal $8 billion public cost, repair better reconciles output/employment and prices. Its nine-month implementation lag leaves vulnerable households exposed (Source 3), supporting limited, targeted relief rather than an indiscriminate rebate. Source 4 raises concern about persistent expectations: monetary policy may restrain demand and anchor them, but cannot manufacture food or fix roads, and strong tightening would add employment and mortgage pressure. A staged mix is justified, with monitoring of repair delivery and inflation persistence. Forecasts are conditional; another conclusion needs to confront both the bottleneck and household hardship.

Marking criteria

• Identifies the supply shock and distinguishes demand relief from restored capacity. [3 marks]
• Uses the two forecast comparisons and equal fiscal costs. [4 marks]
• Integrates household hardship and repair timing. [3 marks]
• Evaluates the two stated objectives and justifies a recommendation. [4 marks]
• Explains monetary complementarity, expectations and employment trade-offs. [4 marks]
• Qualifies the forecasts and acknowledges a defensible alternative. [2 marks]