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 ‘