← Macro-economic influences on the New Zealand economy
Inflation through AS/AD (every paper)
Demand-pull = AD right. Cost-push = SRAS left. The output direction distinguishes them. Exam-style Oil prices surge worldwide Explain the likely effect on NZ's price level and output. Oil is a key input → production costs rise → SRAS shifts LEFT. Price level ↑ AND real output ↓ (stagflation pressure). This is COST-PUSH inflation: the shift is supply-side, not demand. ✓ SRAS left: prices up, output down. Contrast: demand-pull would show AD right with output UP. ℹPolicy response discipline
Cost-push inflation poses the policy dilemma: OCR ↑ fights the inflation but deepens the output fall. Saying that trade-off explicitly is an Excellence move. ✕Demand-pull vs cost-push — read the OUTPUT direction
Both raise the price level, so price alone does not tell them apart. Demand-pull (AD shifts right) raises price AND output TOGETHER. Cost-push (SRAS shifts left) raises price while output FALLS — the stagflation combination. If a scenario mentions rising costs (fuel, wages, imported inputs), it is cost-push; if it mentions rising spending, income or confidence, it is demand-pull. Real paper — 2023 Stagflation risk from cost pressures Sharp rises in fuel and commodity prices, and rising wage pressure, hit businesses across the economy. Explain the effect on economic growth. Significant cost pressures affecting almost every firm → SRAS shifts LEFT (AS₁ → AS₂ on the graph). Output falls from Y₁ to Y₂ — economic growth is negatively affected. The price level rises from PL₁ to PL₂ at the same time: falling output plus rising prices is the stagflation risk named in the question. ✓ SRAS left: real GDP falls Y₁→Y₂, price level rises PL₁→PL₂ — cost-push inflation with falling growth, the classic stagflation signature.| Type | What shifts | Price level | Output |
|---|---|---|---|
| Demand-pull | AD → right | ↑ | ↑ |
| Cost-push | SRAS → left | ↑ | ↓ |
Same direction on price, opposite direction on output — that is the whole test.
Monetary policy — both transmission channels
- Demand channel: OCR ↑ → lending/mortgage rates ↑ → consumption (C) and investment (I) fall → AD falls → inflation pressure eases.
- Exchange-rate channel: OCR ↑ → NZD appreciates (better return attracts foreign funds) → imports cheaper → imported inflation falls.
- A full Excellence answer on "why will this policy work" usually needs BOTH channels named, not just one.