Fiscal Policy
What does AD stand for, and what is the equation for it?
Aggregate Demand; AD = C + I + G + (X − M)
What does OCR stand for?
Official Cash Rate
Does a supply-side policy aim to increase AD or AS?
AS (Aggregate Supply)
Name the five macroeconomic objectives.
Steady economic growth, low unemployment, low & stable inflation, a favourable balance of payments, an equitable distribution of income
What does RMA stand for?
Resource Management Act
What are the two ways the government can carry out expansionary fiscal policy?
Increase government spending, and/or decrease taxation
What is the Policy Targets Agreement (PTA), and what is its target range?
The agreement requiring the Reserve Bank to keep inflation between 1% and 3% (2% midpoint)
Name two examples of interventionist supply-side policies.
Any two of: investment in human capital/training, R&D support, infrastructure provision, direct business support
On the PPF, what does a shift of the whole curve outward represent?
An increase in productive capacity (e.g. from new technology or more resources)
What does NZU stand for, and which scheme uses it?
New Zealand Unit; used under the Emissions Trading Scheme (ETS)
What is the difference between a Budget Surplus and a Budget Deficit?
A surplus is when revenue is larger than spending (contractionary); a deficit is when spending is more than revenue (expansionary)
If the OCR is decreased, what happens to interest rates, and what effect does this have on AD?
Interest rates fall; borrowing rises and saving falls, so C and I rise, causing AD to rise
Give two examples of market-based supply-side policies.
Any two of: privatisation, deregulation, tax cuts, labour market reforms
What is the difference between an inflationary gap and a deflationary (recessionary) gap?
An inflationary gap is when actual output is greater than potential output; a deflationary gap is when potential output is greater than actual output
What command word signals Excellence-level analysis in AS91227?
Justify
Explain what happens to AD, Y and PL when the government increases spending on infrastructure.
AD shifts right; real GDP (Y) rises; the price level (PL) rises, causing demand-pull inflation
Trace the full chain of effects when the OCR is increased, through to the Balance of Payments.
OCR up → interest rates up → foreign capital attracted → NZD appreciates → exports less competitive → unfavourable Balance of Payments
Explain what happens to real GDP and the price level when a supply-side policy is successful, and why this differs from a demand-side policy.
AS shifts right, so real GDP (Y) rises AND the price level (PL) falls — unlike demand-side policy, growth happens without extra inflation because production costs fall
Explain the difference between demand-pull and cost-push inflation.
Demand-pull inflation is caused by AD shifting right; cost-push inflation is caused by AS shifting left (rising production costs)
Explain how the ETS creates a financial incentive for firms to reduce emissions.
Firms must buy and surrender NZUs to cover their emissions; cutting emissions means buying fewer NZUs, saving money — incentivising lower emissions or cleaner technology
The government wants to reduce unemployment through increased spending, but is worried about inflation. Justify a secondary policy that could combine with this to minimize that risk.
A contractionary monetary policy (e.g., raising the OCR) to slightly cool AD, easing the demand-pull inflation without reversing the fall in unemployment
Explain why a contractionary monetary policy might be needed alongside an expansionary fiscal policy.
Expansionary fiscal policy shifts AD right, causing demand-pull inflation; a higher OCR reduces C and I, easing AD back towards target and keeping inflation within the 1–3% PTA range without cancelling out the growth
Justify why a combination of interventionist and market-based supply-side policy might work better than either alone.
Example: interventionist policy (e.g. training) builds long-term human capital while market-based policy (e.g. tax cuts) provides immediate incentives; together they raise both the capacity and the willingness to produce, achieving stronger long-run AS growth than either alone
Demand-pull inflation is caused by AD shifting right; cost-push inflation is caused by AS shifting left (rising production costs)
Derived demand means demand for labour comes from demand for the goods/services labour produces; as firms increase output, they need more workers, so demand for labour rises
What is the key difference between a Merit-level and an Excellence-level answer in AS91227?
Merit explains the direct impact and flow-on effects in detail using models; Excellence justifies a COMBINATION of policies that minimises flow-on effects on two other issues, with models integrated directly into the explanation