2.1
Assessment Schedule – 2010
Economics: Describe inflation and its causes and effects using
economic models (90794)
Code
Q
Evidence
Achievement
Merit
Excellence
ONE
A
(a)
Inflation: 2007 J, 2007 D, 2008 J, 2009
M, 2009 J, 2009 S, 2010 M
Deflation: 2008 D, 2009 D
Disinflation: 2007 S, 2008 M, 2008 S
A
(b)
Disinflation is a period of inflation less
than that of the previous period (fall in
rate of inflation).
Deflation is a decrease in the general
price level of an economy.
Correctly
identifies one
period for each
type –and
includes both
year and quarter
Accurately
describes the
difference
between
disinflation and
deflation
A
(c)
Recession phase, downturn
OR
Boom, upswing
Correct phase
identified
A
(d)
A: Peak
B: Downturn
C: Recession or Trough
D: Boom or Upswing
Correctly
identifies 3 out
of the 4 phases
A
(e)
Petrol price rise is an individual price rise.
An increase in the price level is inflation
(persistent price rise). Because petrol is
used in the production of many other
goods a price rise in petrol will increase
the costs of production for all those goods
which include petrol as an input. Firms
raise prices to maintain profits so the
price level increases.
Accurately
describes an
individual price
rise and a
general price rise
or
M
Explains how
petrol is used as
an input and
thereby increases
costs of
production
1
TWO
A
(a)
M = Money Supply
V = Velocity of Circulation
P = Price level
Q = Real Output
Correctly
identifies all
variables and
writes them in
full
A
(b)
Inflation is an increase in the price level.
Money supply is total quantity of money in
the economy. Because the quantity theory
of money equation says that MV=PQ if
the money supply increases and velocity
remains constant, then there must be an
increase in either price or quantity to
absorb the increase in order for the
equation to remain true. An increase in
GDP (output) of an equal amount to an
increase in money supply will absorb the
increase so there will be no increase in P
(price) and inflation will not occur.
Defines money
supply and
identifies that
MV=PQ
A
(c)
(i) four (4)
Correctly states
four (4)
A
(c)
(ii) The quantity theory of money states
that MV=PQ. If the money supply
increases by 10% then price (P) would
also increase by 10% as the equation
holds that V and Q are constant (cannot
change).
Correctly states
that price level
would increase
by 10%
(d)
The quantity theory of money assumes
that V and Q are unchanged but these
can change – eg GDP can increase, so if
V and Q change then increases in M may
cause an increase in Q while P remains
unchanged, so increases in M do not
necessarily lead to increases in P.
or
M
or
M
M
or
E
Or
The crude quantity theory of money
assumes V and Q are constant but
evidence shows that this is not always
true. When prices rise rapidly people will
be reluctant to hold money because it is
losing purchasing power so they will
exchange it for goods and services as
quickly as possible, so V changes.
Explains the
effect of an
increase in
money supply on
price level and
correctly states
how an equal
increase in GDP
or Q will mean
that inflation will
not occur
Explains that
price level would
increase because
V and Q are
constant
Explains that V
and Q can
change
Explains that V
and Q can
change plus
refers to the
effect on the
price level from
a change in the
money supply
when V and/or Q
are not held
constant
2
THREE
A
(a)
Graph One : (Tax cuts)
The New Zealand Economy
Correctly
completes the
AD/AS model
including correct
labelling; uses
arrows, lines and
labels to show
changes
AS
Price
Level
( $)
PL2
AD1
PL1
AD
Y1
Y2
Real Output
 AD curve shifted to the right and
labeled
 New equilibrium PL and real
output accurately labeled
A
(b)
Aggregate demand is the total demand for
all goods and services in the economy at
all price levels. Household consumption is
a component of aggregate demand. An
increase in household incomes will result
in an increase in consumption thereby
increasing aggregate demand. An
increase in aggregate demand will cause
price levels to increase causing demand
pull inflation. The AD curve shifts to the
right from AD to AD1, price level
increases from PL1 to PL2.
Describes
aggregate
demand and
identifies
demand pull
inflation
Refers to the
AD/AS model to
explain how the
event impacts on
inflation (PL)
and (real output)
(c)
Aggregate Demand is the total demand
for all goods and services in the economy
at all price levels. GST is an indirect tax
which is applied by the government to
goods and services. An increase in GST
will cause an increase in the cost of
goods and services. Any increases in
income as a result of tax cuts will be
somewhat absorbed by the increases in
GST. So the increase in consumption
may not occur therefore aggregate
demand may not increase, and as there
would not be an increase in price levels
due to an increase in aggregate demand,
demand pull inflation would not occur.
Describes
aggregate
demand
identifies reason
for change to
aggregate
demand
Identifies and
justifies reasons
for changes in
the aggregate
demand curve to
predict aggregate
demand shift
or
M
A
or
M
or
E
Mm for question
3 (b) and (c)
Note: question asks impact of increase
“after the October 1st increase” - students
may suggest AD will increase but this is
only likely to occur prior to implementation
of the increase to 15%.
3
FOUR
A
(a)
Graph Two: (GST increases for firms)
The New Zealand EconomyAS
AS1
AS
Price
Level
( $)
PL2
PL1
Correctly
completes the
AD/AS model
including correct
labelling; uses
arrows, lines and
labels to show
changes
AD
Y2
Y1
Real Output
 AS curve shifted to the left and
labeled
 New equilibrium PL and real
output accurately labeled
A
(b)
Aggregate supply is the total supply of all
goods and services in the economy at a
range of prices. GST is an indirect tax
which is applied by the government to
goods and services. An increase in GST
will cause an increase in the cost of inputs
for production. Because of these
increased costs of production firms may
raise prices to maintain profit margins.
Aggregate supply decreases from AS to
AS1. Price level increases from PL1 to
PL2. This is cost push inflation.
Describes
aggregate supply
and identifies
cost push
inflation
Refers to the
AD/AS model to
explain how the
event impacts on
inflation (PL)
and (real output)
(c)
Company tax is a direct tax which is
payable by firms on their profit. A
decrease in the company tax rate will
result in a decrease in the amount of tax
payable by a firm on its profits. This will
allow the firm to increase productive
investment (increase in the “I” component
of “AD”) and be more willing to supply
goods as they have increased profit
margins. It will also encourage Australian
firms to set up in NZ. Aggregate supply
should increase offsetting the decrease in
aggregate supply caused by the
increased cost of production due to the
increase in GST.
Describes
company tax and
identifies impact
on firm’s profit
Identifies and
justifies reasons
for changes in
the aggregate
supply curve to
predict aggregate
supply shift
or
M
A
or
M
or
E
Mm for question
4 (b) and (c)
4
FIVE
A
(a)
(i) Households: negative effects include
diminishing purchasing power particularly
for fixed income earners: value of savings
becomes eroded away, decreasing
wealth; cost of living increases as prices
increase; more inequality as income
distribution is less equal – some can get
wage increases while others miss out;
fiscal drag occurs reducing disposable
income.
Positive effects: borrowings are easier to
repay in the future; house prices increase
due to speculators; those households who
have incomes which are rising faster than
inflation benefit; households with the
capacity to speculate eg purchase
investment property, antiques, gold,
shares etc benefit.
Describes one
impact of
inflation on
households
Explains the
impact of
inflation on
households,
includes
reference to
fixed income
earners and/or
decreased
purchasing
power
(a)
(ii) Retirees with savings: negative
effects include as savings are worth less
in future due to inflation, the purchasing
power of the savings falls. Retirees are
also generally on fixed incomes and so
have no ability to increase income.
Describes one
impact of
inflation on
savers and/or
those on fixed
incomes
Explains the
impact of inflation
on savers and
includes reference
to decreased
purchasing power
(a)
(iii) Firms seeking to expand and
export: negative effects as exports
become less competitive; investments
become more expensive as price of
capital goods increase and/or because of
increased interest rates; costs of
production also increase as workers
demand pay rises; market signals are
distorted as investors speculate and it
becomes difficult to plan for the future and
enter long term contracts as future costs
are not predictable. Positive effects may
include cheaper imported raw materials
and cheaper investment loans as real
amount borrowed falls.
Describes one
impact of
inflation on firms
Explains the
impact of
inflation on
firms, include
reference to
decreased
international
competitiveness
due to exports
being more
expensive for
foreigners
(b)
Wage costs are the wage and salary
payments that firms must make to staff.
Inflation is a rise in the price level. During
times of inflation workers lobby for wage
increases to cover the increased costs of
living associated with price increases. As
a result of meeting wage increases firms’
costs of production increase causing them
to put prices up to maintain their profit
margins. This causes prices to rise even
higher as a consequence of the increase
in wages. Continued lobbying to increase
wages higher again to meet the increased
prices only serves to increase costs of
production further causing even more
price increases or what is called a wage
price spiral.
Describes the
impact of
inflation on firms
and households
Explains the
impact of
inflation on firms
and households
and includes
reference to
increased wages
as an increased
cost of
production
or
M
A
or
M
A
or
M
or
E
A
or
M
Me for question
5 (a) (i) (ii) (iii)
5
Judgement Statement
Achievement
Achievement with
Merit
Achievement with
Excellence
9 x A or higher
Achieved
plus
6 other Ms or higher
(6/12)
Merit
Plus
Any 2 Es
(2/4)
(9/19)
6