HCI 2022 Econs TYS Suggested Case Study Answers (students)

Suggested Answers to A Level 2022 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit 2022 A-Level Case Study Question 1 (a ) Use a supply and demand diagram in each case to explain why: (i) the price of fresh fruit and vegetables in Australia has risen as a result of the drought. [2] The drought would have resulted in the destruction of fruits and vegetables harvest, which is a negative supply shock, causing the supply curve to shift leftwards from S0 to S1 hence leading to a shortage which increases the price from P0 to P1. (i) international tourist arrivals into Australia are expected to fall as a result of the bush fires. [2] The bush fires would have resulted in a change in tastes and preferences of tourists to avoid the risk of being affected by the smoke/fire to their health and hence demand will fall from D0 to D1 hence leading to a fall in output (tourist arrivals) from Q0 to Q1. (b ) With reference to the data, explain one possible reason for the change in Australia’s budget balance from February to June 2020. [2] From Figure 1, Australia Budget Balance went from a budget surplus in Feb 2020 to a budget deficit in June 2020. One possible reason for the change could be due to the government needing to spend “an extra A$70 billion to A$90 billion on stimulus and support measures to help the nation recover” (Extract 3), hence worsening the budget deficit.

Suggested Answers to A Level 2022 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit (c ) With reference to Extract 2, explain why a nominal rate of interest of 0.25% in March 2020 would be described as being ‘negative’ in real terms. [2] Real interest rates = nominal interest rates – inflation rate. From Extract 2, inflation rate in March 202 was 2.2%, real interest rates will be ‘negative’ in real terms of -1.95%. [0.25% - 2.2% = -1.95%] (d ) Explain how a negative real interest rate is likely to affect savings by consumers and the exchange rate in Australia. [4] Savings is necessary to fund investment. However, in times of negative real interest rate, the opportunity cost of savings is higher. Hence it is better to spend on current consumption than to save for future consumption as purchasing power (value of saving) is eroded. This will lead to fall in consumers’ savings. With negative real interest rate, it would also likely to result in ‘hot money’ outflows due to the negative returns on investment. These outflows would lead to Australian currency being sold and converted to foreign currencies causing the supply of Australian currency to increase. This exerts a downward pressure on the external value of Australian currency, hence resulting in a depreciation. (e ) Given the weakening of Singapore’s exchange rate, discuss whether a stronger exchange rate would be of overall benefit to Singapore when ‘the global economy is in deep recession’ (Extract 4). [8] R1: A stronger exchange rate would benefit Singapore Given Singapore’s high import dependence, due to a lack of natural resources, large and sudden increases in prices of imported inputs will result in severe imported inflation. A stronger exchange rate will make imported inputs cheaper in domestic currency and at the same time, Singapore’s exports will become more expensive in foreign currency. With reference to the above diagram, a stronger exchange rate will shift AS0 to AS1, reducing imported inflation and AD0 falls to AD1, reducing demand pull inflation and overall, GPL falls from P0 to P1. A stronger exchange rate will dampen the growth in AD and reduce the rate at which the cost of imported inputs is rising, allowing prices to rise more slowly. R2: Cost of a stronger exchange rate for Singapore A strengthening of the Singapore exchange rate could result in exports being more expensive in terms of foreign currency, and this can decrease the demand for Singapore’s exports. As Singapore’s exports priced in SGD remain unchanged, strengthening of Singapore’s exchange rate can reduce export

Suggested Answers to A Level 2022 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit revenue (measured in SGD) and worsen the balance of trade. Assuming there is a decrease in the real trade balance (fall in BOT due to a fall in the demand for exports), this will in turn decrease the aggregate demand since net export is a component of the aggregate demand and national income will decrease through the reverse multiplier process. With reference to the above diagram, a fall in the net exports will shift the aggregate demand (AD) from AD0 to AD1. Through the reverse multiplier process, it will lead to a more than proportionate decrease in national income, from Y0 to Y1. At the same time, cyclical unemployment will increase due to the fall in real output from Y0 to Y1 as less resources are hired due to fall in production. Conclusion Ev1: From Extract 4, given that “the global economy is in deep recession”, it is quite unlikely that significant sources of inflation exist, and hence a stronger exchange rate, which serves to address inflation, may not be of use Ev2: Furthermore, it will make our exports less competitive, and it could potentially worsen the impacts of a global recession that could have on Singapore’s economy given that Singapore is one of the world's most open economies, and is usually hit hardest and earliest during any global shock. Summative Conclusion: Hence, to conclude, a stronger Singapore dollar would not be overall beneficial to Singapore when ‘the global economy is in deep recession’ and we usually prefer a zero percent appreciation of the exchange rate or even weakening of Singapore’s exchange rate. MARK SCHEME: L2 Breath: Covers 2 requirements. Explains both benefit and cost of stronger exchange rate to Singapore R1: A stronger exchange rate would be beneficial to Singapore R2: A stronger exchange rate would be “costly” to Singapore Depth: Applies relevant economic concepts or theories Explains with rigour and details Good application & understanding of the characteristics of deep recession faced by the global economy Answer uses case evidence from Extract 4 4 - 6 L1 Lacking any of the L2 criterions 1 - 3 E2 Makes a clear, justified and convincing stand based on both requirements; synthesis arising from analysis of both requirements and prior evaluation with reference to case material where appropriate. 2 E1 Makes a clear stand without any attempts to substantiate or justification is weak or not convincing. 1

Suggested Answers to A Level 2022 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit (f) Discuss whether fiscal policy is the most effective way to bring unemployment down in Australia. [10 ] Introduction Unemployment refers to the situation where people in the labour force, who are willing and able to work, but are unable to find employment. With reference to Figure 2 that illustrate Australian job losses since coronavirus restrictions indicated that unemployment was caused by demand-deficient/cyclical reason in general where the accommodation and food sectors were more severely affected. R1: Explain how fiscal policy can bring unemployment down in Australia With reference to the above figure, suppose aggregate demand is initially at AD1. The existence of output gap (YF – Y1) suggests that the economy is facing demand-deficiency, which is due to the coronavirus restrictions in Australia and in such situation, expansionary fiscal policy can be used to resuscitate the economy. Expansionary fiscal policy involves running a budget deficit as government spending is raised while direct taxes are reduced. From Extract 3, higher spending by government on stimulus (e.g., spending on services