For an inflation question, how do I choose which policy to recommend?

Work out what kind of inflation it is first. Demand-pull and cost-push look the same on a price index and need almost opposite responses, and a policy recommended for the wrong cause is where the evaluation marks go.

Diagnose from the scenario

Demand-pull — aggregate demand is rising faster than the economy can supply. Signals: strong growth, falling unemployment, rising wages, a consumer boom, loose monetary or fiscal policy. Prices rise because people are competing for limited output.

Cost-push — the costs of production have risen. Signals: a commodity or energy price shock, a currency depreciation raising import prices, a jump in wages not matched by productivity, a supply disruption. Prices rise even though demand has not.

The distinction matters because the standard response — raising interest rates to cool demand — treats demand-pull and barely touches cost-push. Against a supply shock it reduces output and employment while leaving the cause untouched.

That is the point most questions are built around.

Match the policy to the diagnosis

Demand-pull responds to contractionary policy. Higher interest rates reduce borrowing and spending; tighter fiscal policy — higher taxes or lower government spending — does the same more directly. Both work on the actual cause.

Cost-push is harder, and saying so is worth credit. Options are limited: supply-side measures to raise productivity, which work slowly; reducing indirect taxes on the affected input; or accepting the one-off price rise and acting only if it feeds into expectations.

The honest answer to a cost-push question is often that there is no good short-term policy, and that a central bank faces a genuine trade-off between inflation and output. Examiners reward recognising the trade-off far more than a confident recommendation.

Always name the costs of the policy

Whatever you recommend, the evaluation marks are in what it costs.

Higher interest rates reduce investment, raise mortgage costs, may appreciate the currency and hurt exporters, and work with a long and uncertain lag — often quoted as up to two years. By the time they bite, conditions may have changed.

Tighter fiscal policy is politically difficult, slow to legislate, and cuts may fall on spending with long-term value.

Supply-side policy is the right answer for cost-push and takes years. It is not a response to this quarter's figures.

Expectations are the point most candidates miss

Inflation becomes self-sustaining when people expect it. Workers bargain for higher wages in anticipation, firms raise prices pre-emptively, and the expectation delivers the outcome.

This is why central banks care about credibility, and why a small rise in rates can work mainly by signalling intent rather than by changing borrowing much.

Raising this moves an answer into the top band, because it explains why policy acts on beliefs and not only on spending.

The shape of a strong answer

Diagnose the type from the scenario's evidence. Recommend the policy that addresses that cause. State the main cost and the time lag. Note what would change your recommendation — if the shock proves temporary, if expectations are already shifting, if unemployment is already high.

That last conditional is what distinguishes evaluation from assertion.