EJC Econs 2022 A-Level H2 P1 Q1

Suggested Answers for 2022 A-Level H2 P1 Qn 1: Economic problems caused by drought and the coronavirus (COVID-19) pandemic (a) Use a demand and supply 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] • Australia’s lengthy drought has damaged crops (extract 1) thus lowering crop yield and the amount farmers could produce. This caused supply of fresh fruit and vegetables to fall, and this is reflected by a leftward shift of the supply curve from SS0 to SS1. Market for fresh fruit and vegetables in Australia • At original price P0, quantity demanded Qd exceeds quantity supplied Qs, creating a shortage that exerts an upward pressure on price. As a result, equilibrium price rises. (ii) International tourist arrivals into Australia are expected to fall as a result of the bush fires. [2] • International tourist arrivals into Australia are expected to fall as a result of the bush fires due to a fall in demand. This is because tourists have a change in taste & preference away from visiting Australia as they are concerned with their health and safety caused by the bush fire and the resultant smoke haze (extract 1). • With a leftward shift of the demand curve from DD0 to DD1, a surplus exists at the current market price P 0, causing a downward pressure on prices. As prices decrease, quantity demanded increase while quantity supplied increase until Market for Tourism in Australia P0 0 Quantity Price SS0 DD0 P1 Q DD1 Q0 Q1 Surplus

quantity demanded equals quantity supplied. Hence, the equilibrium quantity falls from Q0 to Q1, explaining the fall in international tourist arrivals into Australia. (b) With reference to the data, explain one possible reason for the change in Australia’s budget balance from February to June 2020. [2] • Australia’s budget balance worsened as the budget surplus in February 2020 fell into a budget deficit in June 2020. • This could be due to an increase in government spending to deal with the damages caused the bush fire (extract 1) and to support business and individual during the COVID -19 pandemic (extract 2) Or • This could also be due to a fall in tax revenue as unemployment increase due to the recession caused by the bushfire and COVID-19 pandemic, hence government would be able to collect less income tax and goods and services tax. (c) With reference to Extract 2, explain why a nominal rate of interest of 0.25% in March 2020 would be describe as being “negative” in real terms. [2] • Real interest rate = nominal interest rate - inflation rate • According to extract 2, the inflation rate in Australia in the 12 months to March is 2.2%. Since inflation rate is higher than nominal interest rate (0.25%), real interest rate will be negative at -1.95%. (d) Explain how a negative real interest rate is likely to affect savings by consumers and the exchange rate in Australia. [4] • As real interest rate turns negative, the returns to saving will become negative, hence reducing savings by consumers as the money saved in the bank could be better spent on consumer goods (opportunity cost of saving is higher). • Negative real interest rate will result in outflow of hot money as households seek higher returns in other countries with higher real interest rate. The outflow of hot money will increase the supply of domestic currency, hence there will be a surplus of domestic currency at the original exchange rate, and this create a downward pressure on exchange change. Hence there will be a depreciation of exchange rate in Australia. (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’. [8] Command Discuss whether – benefits and costs Start Point Strong exchange rate End Point Benefit economy – in terms of achieving the four macroeconomics aims Content Impact of appreciation of exchange rate on economy, AD/AS analysis Context Singapore, global recession Introduction • Exchange rate is the external value of a country’s currency in terms of another currency. A stronger exchange rate refers to an appreciation of a country’s currency, which means that its external value increases relative to a foreign currency. The same unit of the country’s

currency can now be exchanged for more units of foreign currency. The impact of an appreciation of the Sing dollar on the Singapore economy could be analysed through the AD/AS framework. Point 1: A strong er exchange rate might benefit the Singapore economy in terms of price stability. • A stronger Sing dollar will make Singapore’s imports relatively cheaper in domestic currency terms. Cheaper import prices will lower cost of production for firms in Singapore, given the high dependence on imported raw materials and semi-finished materials in their production due to a lack of natural resources. This will shift the SRAS curve downwards, thereby curbing import cost-push inflation. Imported finished goods and services will also become cheaper in domestic terms, thereby alleviating import price-push inflation. • At the same time, the appreciation of SGD raises export prices in foreign terms. Assuming that PEDx > 1, quantity demanded for exports will decrease more than proportionately and this will lead to a decrease in export revenue. With a fall in price of imports, this encourages citizens to buy more imports and instead switch away from buying domestic goods. Assuming PEDm > 1, this will lead to a more than proportionate rise in quantity demanded for imports and lead to a rise in import expenditure. The appreciation of the SGD therefore reduces Singapore’s net exports assuming MLC holds , thereby reducing AD, to curb demand-pull inflation. • Assuming that the increase in SRAS is greater than the fall in AD, real national income will increase from Y1 to Y2 while GPL will fall from GPL1 to GPL2 Extent of benefit to the Singapore economy may not be very significant in the face of a global recession ➢ However, given the global economy is in deep recession, the extent of fall in X -M may be very great as foreign consumers may also be reducing consumption of domestic and foreign goods and services. Thus, with t he recession and an appreciation of the Singdollar, the extent of fall in X-M may be very large. ➢ Also, with the global economy in deep recession, there is less demand for factors of production and the prices of factors of production globally may be low and the risk of cost- push inflation may not be very large. Point 2: A strong er exchange rate might harm the Singapore economy in terms of economic growth, unemployment, and balance of trade. Positive effects of appreciation of Sing dollar on Singapore economy

• A stronger Sing dollar might result in negative growth and higher unemployment instead if the decrease in AD is more significant than the increase in SRAS. • If the increase in SRAS is smaller than the fall in AD, real national income will decrease from Y1 to Y2 while GPL will fall from GPL1 to GPL2. Figure 4: Negative effects of appreciation of Sing dollar on Singapore economy • The fall in AD is greater due to the global recession, where foreign households would be experiencing a fall in real disposable income, hence demanding less of Singapore’s exports, assuming normal goods. • The fall in real output would means that firms wou ld experience a rise in stocks and inventories, hence reducing production of goods and services. This will reduce the deman