YIJC 2024 JC2 H2 Prelim Essay Q5 Suggested Answer

5 In 2022, Singapore's economy was impacted by global events such as the ongoing supply chain disruptions caused by the Russia -Ukraine war, which led to increased energy prices and inflation. Additionally, the tightening of global monetary policies by major economies, including the Federal Reserve's interest rate hikes, put further pressure on Singapore’s export-driven economy. (a) Explain how the above events led to adverse consequences on the Singapore’s economy. [10] (b) Discuss the policies implemented by the Singapore government to mitigate the adverse consequences brought by the above global events. [15] Suggested answer for (a) R1: Explain the adverse impact of supply chain disruptions caused by the Russia-Ukraine war on the Singapore’s economy. The supply chain disruptions arising from the Russia -Ukraine war led to a rise in general price level (GPL) in Singapore. The two countries are major suppliers of key commodities such as oil and gas. The war disrupted their supply, causing prices of several commodities such as oil and gas to spike. Given that Singapore lacks natural resources and imports these commodities, which are key factor inputs in many production processes in the country, the rise in prices of the commodities would increase unit cost of production. Higher energy prices also drove up electricity and transport costs for firms. Firms typically respond to the rising cost by passing on part of the increase to consumers in the form of higher prices and by cutting back on production. This translates to a fall in short run aggregate supply (AS) causing the AS curve to shift from AS o to AS1 as illustrated in Figure 1. This results in a shortage that causes a rise in GPL from Po to P1. If this increase is sustained, cost-push inflation occurs. The fall in AS also leads to a fall in real national income (RNY) from Y0 to Y1. As firms cut back on output, they also reduce the amount of labour hired and unemployment increases. GPL RNY P0 P1 AD AS0 QF Y0 Y1 O AS1 Figure 1: Fall in AS

R2: Explain the adverse impact of tightening of global monetary policies by major economies on the Singapore’s economy. The tightening of global monetary policies by major economies, including the Federal Reserve's interest rate hikes will have contractionary effects on Singapore ’s economy. The rise in interest rate in major economies such as US increases borrowing costs which will reduce the expected profitability of investments, so investment expenditure (I) will fall. Consumption expenditure (C) also falls due to higher borrowing costs as the loan repayment will be costlier for the consumers. The combination of fall in C & I will lead to a fall in AD. With a fall in AD, firms experiencing excess inventory will cut down production, resulted in few er demand for factors of production such as labour, hence lesser factor income will be paid out and further reduce consumption. National income will fall by a multiple, leading to negative growth and higher cyclical unemployment. This is harmful to Singapore economy, as Singapore is dependent on exports for growth. Fall in national income of our trading partners will imply lesser purchasing power from them to import from Singapore. The demand for Singapore’s export will fall, such that Singapore’s export revenue and net exports will fall ceteris paribus. As a result, Singapore’s AD will fall from AD0 to AD1 and this will lead to a fall in RNY from Y0 to Y1 as shown in Figure 2. As firms cut back on output, they also reduce the amount of labour hired and unemployment increases. The fall in net exports also worsen its balance of trade. Figure 2: Fall in AD Combined effects of a fall in AD and AS As the intention of the major economies to raise interest rates was to slow down their pace of economic growth to reduce inflationary pressures , rather than caus e negative growth , the purchasing power of our trading partners will still remain and hence their demand for Singapore’s exports may not fall by a large extent. So, the fall in AS is likely to outweigh the fall in AD. Therefore, Singapore is likely to experience an overall rise in GPL from P 0 to P1 and fall in RNY from Y0 to Y1 as shown in Figure 3.

Level of Response Mark Scheme (LORMS) Level Descriptor Mark L3 Analysis & Application For an analytical answer that addresses the question thoroughly with clear explanation well supported by tools of analysis, such as AD/AS analysis and diagram. There’s clear and thorough explanation of how supply chain disruptions caused by the Russia -Ukraine war and tightening of global monetary policies by major economies led to adverse consequences on the Singapore’s economy. There is good ability to organise ideas or discriminate between relevant and irrelevant factors. Answer is well-focused on question (e.g., the Singapore’s economy) with the good use of economic concepts, theories or principles. Knowledge & Understanding For an answer that demonstrates an accurate knowledge and understanding of economic concepts, theories related to question, e.g., AD/AS analysis. [8 – 10] [A+A: 10] [A+C: 8-9] L2 Analysis & Application For an under-developed answer that attempts to address the question and explain how supply chain disruptions caused by the Russia-Ukraine war and tightening of global monetary policies by major economies led to adverse consequences on the Singapore’s economy . Answers may be descriptive, lack an analytical approach (e.g., not supported with tools of analysis, incomplete use of graph) or is incompletely explained with gaps in analysis. [Or For a one-sided analytical answer that address only one of the two question requirements, i.e., explanation of the impact of one event only] [5 – 7] [A+K: 7] [C+C: 6-7] [A+0: 6] [K+C: 5-6]

For an answer that is supported with some application to the context of the question (e.g., the Singapore’s economy) . There is limited ability to organise ideas or discriminate between relevant and irrelevant materials. Answer has some relevance to the question context but is generic (e.g., pre- learnt answer that is not focused on addressing the question specifically). Knowledge & Understanding For an answer that demonstrates largely accurate knowledge and understanding of economic concepts, theories related to question, e.g., AD/AS analysis (i.e., no major conceptual errors). L1 Knowledge & Understanding For an answer that shows limited knowledge and understanding of relevant economic concepts and theories (e.g., basic description or definitions). Few valid points made which are scant and inadequately explained. Answers are mostly irrelevant and inaccurate. Answer demonstrates that the meaning of question is not properly grasped or may contain basic errors of theory. [1 – 4] [C+0: 4] [K+K: 2-4] [K+0: 1-2] Markers’ comments • Some students did not identify the two global events correctly e.g. explained the negative impact of inflation on Singapore’s economy. • Most students are able to explain the impact of supply -chain disruptions on Singapore’s economy (e.g. imported cost-push inflation) correctly via a fall in SRAS. • Some students misinterpreted tightening of global monetary policies as a depreciation of currency and wrongly linked to the impact on exports and imports. • Tightening of global monetary policies refer to the increase in interest rates by major economies affecting the cost of borrowing instead of affecting the cost of production of goods and servi