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© Catholic Junior College 9570/01 JC 2 PRELIMINARY EXAMINATION/2023 CATHOLIC JUNIOR COLLEGE JC2 Preliminary Examination Higher 2 ECONOMICS 9570 /01 Paper 1 24 August 2023 No Additional Materials are required. 2 hours 30 minutes READ THESE INSTRUCTIONS FIRST An answer booklet will be provided with this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. Answer all questions. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 8 printed pages. [Turn over

2 © Catholic Junior College 9570/01 JC 2 PRELIMINARY EXAMINATION/2023 Question 1: The Cryptocurrency Revolution Figure 1: Cryptocurrency Prices ($US) Source: CoinMarketCap , assessed 12 July 2023 Extract 1: The Rise of Bitcoin A cryptocurrency is a digital currency which serves as an alternative f orm of payment created using encryption algorithms. Bitcoin and Etherum ar e the two largest cryptocurrencies . Bitcoin ushered in the age of cryptocurrency, but it took q uite a while before the public sat up and took notice. It was created by a mysterious individual with the promise of moving monetary policy out of the hands of governments and central banks into an autonomously managed system. Bitcoin achieved a remarkable rise in 2020 despite many things that would normally make investors wary, including US-China tensions, Brexit and, of course, an international pandemic. Besides all this mainstream enthusiasm, the havoc brought by COVID-19 has led to huge stimulus packages from governments around the globe and many central banks printing more money. This drove up inflation fears and the possibility of eroding purchasing power. In the face of this threat, investments like Bitcoin are being considered a store of value. The price of Bitcoin is notoriously driven by sentiments and is highly volatile. Despit e its volatility, part of what makes Bitcoin valuable is the fact that it is scarce. The maximum supply of Bitcoin is limited to 21 million and there are already about 18.5 million in circulation . The production of additional coins through crypto mining, which is increasingly complex, will incur significant costs where more computers with higher processing power are needed to get Bitcoin today. Given these dynamics, speculators have rushed into the space to take advantage of the anticipated price appreciation. Source: Various

3 © Catholic Junior College 9570/01 JC 2 PRELIMINARY EXAMINATION/2023 Extract 2: Singapore has grand ambitions to become a global crypto hub Singapore is seeking to attract global investments and cement itself as a key player for cryptocurrency-related businesses as financial centers around the world grapple with approaches to handle one of the fastest growing areas of finan ce. According to the Infocomm Media Development Authority’s Future of Services report, the blockchain market in Singapore has the potential to achieve a market spending of up to US$272 million in 2022 and up to US$2.6 billion by 2030 with a compound annual growth rate of 32.5% . "We think the best approach is not to clamp down or ban these things," said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), which regulates banks and financial firms. Instead, MAS is putting in place "strong regulations", so firms that meet its requirements of addressing the various risks involved, are allowed to operate, he said. The highly volatile nature of cryptocurrency presents various challenges to our economy - ranging from displaced workers to declined confidence in ou r financial system. "With crypto-based activities, it is basically an investment in a pros pective future, the shape of which is not clear at this point," said Menon. "But not to get into this game, I think risks Singapore being left behind. Getting early into that game means we can have a head start, and better understand its potential benefits as well as its risks." Source: Adapted from The Business Times , 2 Nov 2021 Extract 3: Environmental impacts of crypto mining in the United States The amount of crypto mining operations has increase d exponentially in the United States since 2020. Its explosive growth, which required an intensive and often volatile power consumption, has created a series of negative spillover effects. This includes increased risks for local electrical grids —straining equipment, causing service interruptions and safety hazards, increased total carbon emissions and local air pollution. Crypto mining activities can also push up retail electricity prices, and the economic impact falls disproportionately on low-income households. As long as the reward is high enough (i.e., the pri ce of Bitcoin is high enough), miners will be incentivised to ramp up operations as quickly as possible, with little concern about the source of energy. Big mining operations have shown an inclina tion to invest in inefficient power sources, like defunct coal plants or low-capacity gas plants , as long as electricity can be made available quickly. Unlike other large electricity users, cryptocurrency mining operations have a short time horizon, and most crypto players have shown little interest in investing in new clean energy. As more mining machines enter the race, the difficulty of the computational problem will increase, and the electricity required to win increases. Over time, e lectricity usage by miners will climb to an extraordinary level. This will pose environmental and economic concerns that may be difficult to remedy in future. Source: Various

4 © Catholic Junior College 9570/01 JC 2 PRELIMINARY EXAMINATION/2023 Extract 4: China’s top regulators ban crypto trading and mining To date, crypto mining does not generate the local and national economic benefits typically associated with businesses using similar amounts of electricity. Instead, the energy is used to generate digital assets whose broader social benefits have yet to materialize. China banned such activities completely in 2021. Many countries are a lso increasingly starting to restrict crypto mining. However, the potential for crypto mining to relocate abroad—such as to areas with dirtier energy production—is a concern. The move to ban crypto mining in China is beyond just environmental concerns. Another concern would be that privately operated highly volatile digital currencies could undermine their control of the financial and monetary systems, increase system ic risk, promote financial crime, and hurt investors. Analysts say China also sees cryptocurrencies as a threat to its sovereign digital Yuan, which is at an advanced pilot stage. However, the Chinese government has struggled in the past to stop internet users from evading its controls. China's most powerful regulators intensified a crackdown on cryptocurrencies with a blanket ban on all crypto transactions and mining, hitting Bitcoin and other major coins and pressuring crypto and blockchain-related stocks to root out these unregulated and illegal cryptocurrency activity. To ensure that crypto mining is not simply pushed from one local community to another, perhaps a tax could be considered, by having crypto miners pa y their fair share of the costs imposed on local communities and the environment. Source: Adapted from Reuters , 25 Sep 2021 Questions [Total: 30] (a) With reference to Figure 1, compare the price of Bi tcoin prices with that of Ethereum from June 2020 to May 2021. [2] (b) Using a diagram and Extract 1, explain the volatile nature of Bitcoin prices. [4] (c) Explain any one function of the price mechanism in the Bitcoin market. [2] (d) W