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Economics HSC question help. (1 Viewer)

TeheeCat

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2019
I remember doing this exact same question during class, and majority of our class (including me) got it wrong on the first go. This was a while ago and I tend to forget stuff, so my explanation might be incorrect (anyone here is welcome to correct me lol)

Here, we see that headline inflation has increased whereas underlying inflation has decreased slightly from year 1 to 3. It helps to remember the difference between headline inflation and underlying inflation. Headline inflation is the total inflation in economy, which includes commodities such as energy prices.

Now from that hint, global oil production will influence headline inflation as it's a commodity. If there's an increase in inflation, it means there's a rise in general price levels which happens when demand is outpacing supply. So we can eliminate D, for an increased global oil production means a greater supply for commodities and thus doesn't increase the price levels.

This leaves A and B (im not sure how to explain tariffs, but will get back to C), both are viable options as they result in a smaller supply of commodities (less oil is produced, leading to a shortage in oil supplies while flooding would ruin agricultural resources, also creating a shortage).

But let's inspect C: increased minimum wages (again, I'm unsure how to explain tariffs on inflation). If there's an increase in minimum wages, consumers are provided greater disposable income which in turn provides them a greater capacity to consume more. As a result, there will be an increase in demand for goods and services which in turn increases inflation (this is called demand-pull inflation). But the question states that underlying inflation decreased. So C is out.

Now for A and B. When the government implements an expansionary fiscal policy, they plan to boost the level of economic activity through reducing taxation or boosting expenditure. Either way, it results in a increase in consumption and aggregate demand, leading to stronger economic growth. Due to a rise if aggregate demand + growth, inflation rate will rise. But again, it is stated that underlying inflation decreased.

So B is the most correct answer, by elimination process. :)

Again, I might have made some errors in my explanation... so feel free to correct me.
 

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