In 2022, the economy of Zamia experienced a sharp rise in inflation, reaching 18.5%, driven largely by global supply chain disruptions and rising energy costs. The government faced pressure to stabilize prices without triggering a severe recession.
With monetary policy already highly restricted, policymakers looked towards supply-side measures. It was suggested that trade liberalisation policies, such as lowering tariffs on imported intermediate industrial components and raw materials, would help to curb cost-push inflationary pressures. Critics, however, argue that domestic manufacturers may not pass these savings on to consumers, or that a depreciation of the local currency could negate the tariff reductions.
Extract C states: 'It was suggested that trade liberalisation policies, such as lowering tariffs on imported intermediate industrial components and raw materials, would help to curb cost-push inflationary pressures.'
With the help of an AD/AS diagram, explain how a reduction in tariffs on imported inputs can help to reduce inflation.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.