ACJC Macro Policies Tutorial

©ACJC Econs Dept/2024/H2 Macroeconomic Policies Tutorial Worksheet 1 Anglo-Chinese Junior College JC2 Economics 2024 H2 Macroeconomic Policies TUTORIAL WORKSHEET SECTION A: ESSAY QUESTIONS Question 1 The recent worldwide recession caused many governments to re -assess their use of fiscal policy in order to stimulate their stagnating economies. (a) Explain the possible demand-side and supply-side reasons for a recession in an economy. [10] (b) Assess the relative importance of fiscal policy and exchange rate policy to manage Singapore economy when faced with a worldwide recession. [15] Question 2 In 2017, the annual rate of inflation in Singapore was significantly lower than the average rate for Southeast Asia. (a) Explain a possible demand side reason and a possible supply side reason for a rise in the rate of inflation. [10] (b) Assess whether policies designed to prevent a large and continuing rise in inflation in Singapore are the most appropriate policies for all economies. [15]

©ACJC Econs Dept/2024/H2 Macroeconomic Policies Tutorial Worksheet 2 Question 3 Singapore's economy expanded a faster -than-expected 1.8 per cent in the last quarter of 2016. Moving ahead, growth remains uncertain. Internally, Singapore has adopted a policy of restricting foreign labour and restructuring towards productivity-driven growth. Externally, higher US interest rate may lead to higher interest rates in Singapore. Source: Adapted from Channel Newsasia, 3 January 2017 (a) Explain the possible conflicts in government macroeconomic objectives caused by a policy of restricting foreign labour and restructuring towards productivity-driven growth. [10] (b) Assess the impact of higher US interest rate on Singapore’s macroeconomic performance. [15] Additional Essay Practices: Question 4 The rate of unemployment in more than 50 of the world’s countries, including several European countries, exceeds 10%. Governments face a difficult decision about whether income tax rate cuts are the most effective policy measure to reduce unemployment to more acceptable levels. (a) Explain how a reduction in the rate of income taxes paid by workers and firms might have consequences on an economy’s aggregate demand and aggregate supply. [10] (b) Discuss whether a reduction in the rate of income taxes is likely to be the best policy measure to reduce high unemployment in a country. [15] Question 5 In Singapore in 2018, the resident population below the age of 20 fell by 1.5% while the resident population over 65 grew by 6.0%. If these population changes continue into the future, there are likely to be significant consequences for Singapore’s economy. Source: singstat.gov.sg, accessed 22 June 2019 (a) Explain the likely economic consequences of these population changes for Singapore’s economy in the future. [10] (b) Discuss the policy measures that Singapore’s government should take to address the economic consequences of these population changes on its economy. [15]

©ACJC Econs Dept/2024/H2 Macroeconomic Policies Tutorial Worksheet 3 Question 6 There is potential for governments to achieve both inclusive and sustainable economic growth. (a) Explain what is meant by inclusive growth and sustainable growth. [10] (b) Discuss the extent to which it is possible for a small, open economy such as Singapore to achieve both inclusive and sustainable growth. [15] SECTION B: CASE STUDIES Case Study Question 1: Imbalances in the United Kingdom and China economies Table 2: Government debt (percentage of GDP) Year China UK 2010 33.7 76 2011 33.6 81.6 2012 34.3 85.1 2013 37 86.2 2014 39.9 88.1 2015 42.6 89 Source: IMF Table 3: GDP Composition breakdown by percentage in 2015 China UK Consumption Expenditure 37% 65% Government Expenditure 14% 19% Gross Capital Formation 45% 17% Export Revenue 22% 28% Import Expenditure 18% 29% Source: World Bank Extract 5: Is the game up for China’s much emulated growth model? From the early 1990s, China adopted an export -led strategy that delivered continuously increasing shares of the world market, fed by relatively low wages and very high rates of investment, enabling massive increases in infrastructure. It led to big increases in inequality and even bigger environmental problems, but the strategy seemed to work – until 2008-09, when exports were hit by the global financial crisis.

©ACJC Econs Dept/2024/H2 Macroeconomic Policies Tutorial Worksheet 4 Yet even then, China, India and other large emerging markets continued to grow. The talk at the time was that they were already dissociated from the west. In reality, China (and much of developing Asia) had simply shifted to a different engine of growth wi thout abandoning the focus on exports. The Chinese authorities could have generated more domestic demand by stimulating consumption through rising wage shares of national income, but this would have threatened their export-driven model. Instead they put their faith in investments to keep growth rates buoyant. So the “recovery package” in China essentially encouraged more investment, which was already nearly half of GDP. Provincial governments and public sector enterprises were encouraged to borrow heavily and invest in infrastructure, construction and more prod uction capacity. To utilise the excess capacity, a real estate and construction boom was instigated, fed by lending from public sector banks. Total debt in China increased fourfold between 2007 and 2014, and the private debt-GDP ratio nearly doubled to over 280%. All this comes in the midst of an overall slowdown in China’s economy. Exports fell by around 8% in 2014. Stimulus measures such as interest rate cuts do not seem to be working. As such, the recent devaluation of the yuan is clearly intended to help revive the economy. However, it will not really help. Demand from the advanced countries – still the driver of Chinese exports and indirectly of exports of other developing countries – will stay sluggish. Meanwhile, China’s slowdown infects other emerging markets across the world as its imports fall even faster than its exports. A weaker yuan is bad news for export-oriented economies like Singapore, Hong Kong, South Korea and Taiwan as their exports will be more expensive to Chinese buyers. Their exports to other countries will also have to compete against Chinese rivals who have the advantage of a weaker currency. This is not the end of the emerging markets, but is – or should be – the end of this growth model. Relying only on exports or debt-driven bubbles to deliver rapid growth cannot work for long. For developing countries to truly “emerge”, a more inclusive strategy is essential. Sources: The Guardian, 23 August 2015 and The Straits Times, 7 January 2016 Extract 6: New economic crash fears as British families run £40 billion deficit. British families are on course to spend £40 billion more than they earn this year, fuelling fears that the country’s economic growth is based on soaring levels of debt and could easily collapse. The forecast by the independent Office for Budget Responsibility (OBR) led to warnings that the UK could be heading towards a credit crunch similar to that of 2008 because of unsustainable levels of borrowing and household spending. Five years ago, UK households were comfortably not in debt, running a surplus of £70 billion as Britons tightened their belts in the wake of the financial crash and pu