EJC Econs N2022 H2 EQ4

1 2022 H2 A-Level Paper 2 Essay Question 4 During the pandemic, there was a fall in investment and a rise in employment. Innovation- based investment is a good way to stimulate the economy but, unless appropriate government policy action is taken, this might lead to another type of unemployment. (a) Explain how a fall in investment might lead to one type of unemployment while a rise in innovation-based investment might lead to a different type of unemployment [10] (b) Discuss the extent to which a rise in Singapore government spending on investment in major capital projects and in human capital are both required to reduce unemployment in a post-pandemic world. Suggested Response Part (a) (Question Analysis) Approach Command Word Explain how - Process Question Type Causes Start point Factors – fall in investment, rise in innovation-based investment End Point Types of unemployment Content and Context Content • Demand-deficient Unemployment • Structural Unemployment Context Generic/Singapore (I) Introduction State essay approach: Unemployment refers to the situation where people are unable to find employment, even though they are of legal working age and are both capable and willing to work at the current wage rates. There are two types of unemployment, namely demand- deficient unemployment and structural unemployment. This essay seeks to explore the causes of these two types of unemployment. (II) Body Point 1: A fall in investment might lead to demand-deficient unemployment Demand-deficient unemployment arises from insufficient aggregate demand (AD), which may be caused by business cycles or economic shocks . During the COVID pandemic, with the closure of national borders and pessimism over economic outlook, it has adversely affected the business confidence of investors. This has led to a fall in their investment spending. Given that I is a component of aggregate demand [where AD = C + I + G + (X-M)), a fall in investment spending leads to a fall in AD.

2 Figure 1: Demand-def icient unemployment due to fall in AD With reference to Figure 1, the initial equilibrium national income is at Y 1, where AD is equal to aggregate supply (AS). With a fall in AD from AD1 to AD2, firms find that they are unable to sell their current level of output, hence stocks of unsold goods accumulate. Firms will thus reduce production and decrease the derived demand for factors of production, including labour. hence leading to a rise in demand-deficient unemployment. As less labour is employed, less factor income is earned. The initial fall in national income will lead to a further fall in income- induced consumption due to the reverse multiplier effect. The economy moves into recession represented by a further fall in AD from AD 2 to AD 3, it is now at a much lower level of equilibrium national income from Y 1 to Y3. The economy is said to be operating with spare/excess capacity or unemployed