2024 MI Prelims H1 Econs (A) Macro CSQ

2024 H1 EOY Exams – Macro Case Study Suggested Answers (a) (i) Using Figure 2, describe the trend in Indonesia’s budget position as a percentage of GDP from 2019 to 2023 [2] • Indonesia is facing a budget deficit [1] • The deficit as a percentage of GDP is decreasing / improving [1] Or • [Refinement] In 2020, Indonesia’s deficit as a percentage of the GDP is the highest 1 mark for identifying that Indonesia is facing a budget deficit throughout the period 1 mark to describing the trend / one refinement (ii) State the components of government budget. [1] The components are government spending and tax revenue. (b) With reference to Table 1, comment on the reliability of the use of real GDP growth to measure the changes in Indonesia ’s standard of living over time. [6] An economy’s standard of living (SOL) can be defined as the well -being of residents in the economy and is typically categorised into material standard of living and non-material SOL. o Material SOL is associated with the amount of goods and services available for consumption by the residents of an economy. This is usually measured by real GDP per capita. o Non-material SOL is associated with the intangible aspects of well-being such as literacy rates and life expectancy of residents. R1: Real GDP growth is reliable to measure changes in Indonesia’s SOL From Table 1, real GDP growth rates are all positive throughout the period suggesting Indonesia ’s real GDP has increased over the period. The increase in real GDP means higher production of goods and services, which means more goods and services are available for consumption in the country. As such, the material SOL has risen over time. R2: Real GDP growth is not reliable to measure changes in Indonesia’s SOL However, real GDP growth is not reliable as it does not take into account the population changes. Hence, there is a need to look at population growth. T he population growth rates are lower than the real GDP growth rates throughout the period, this means that real GDP per capita has increased. With higher real income per person, purchasing power increases. Each person can purchase more goods and services. Hence, material living standards in Indonesia has increased. There is also a need to look at Gini Coefficient. If the rise in income is concentrated only among the higher -income group and not enjoyed by the lower- income group, not everyone has a rise in purchasing power and material living standards as shown by real GDP per capita. This is so as real GDP per capita is just an average figure. From table XX, there is a slight increase in the

2 value of Gini coefficient . Hence, it is very likely that there is a fairly equal distribution of income. Conclusion Real GDP growth is only reliable to a certain extent in measuring changes in Indonesia’ SOL. There is a need to look at real GDP per capita couple d with Gini Coefficient to determine the change in Indonesia’s material SOL over time. In addition, there is a need to look at the non-material aspects such as pollution index, literary rate to determine the non-material aspects. (c) Explain why Indonesia’s economy expanded in 2023 despite its falling exports. [3] • Increase in domestic consumption (“household consumption grew 4.82 per cent”) and investment (investments up 5.02 per cent in the fourth quarter) [1] , which has outweighed the fall in net exports [1] → overall rise in AD, leading to overall increase in real NY [1] • AD-AS diagram to illustrate increase in real NY (optional) 1 mark – explain the increase in consumption and investment using the Extract 1 mark – explain that this has outweighed the fall in net exports, causing AD to increase overall 1 mark – link an increase in AD to an increase in real NY and hence an expansion of the Indonesia economy (d) With reference to Extract 8, explain how the Federal Reserve’s tightening of its monetary policy can reduce high rates of inflation in the United States. [4] • Tightening of monetary policy → Fed has raised interest rates [1] • Increase cost of borrowing → fall in C and I → fall in AD [1] • Fall in AD reduces GPL, reducing the rate of inflation ( demand-pull inflation) [1] 1 mark – identify “tightening of monetary policy” as an increase in interest rates in the US 1 mark – explain why C and I falls given an increase in interest rate 1 mark – explain that a fall in AD causes a fall in demand-pull inflation 1 mark – diagram (e) (i) With reference to Extract 8, explain why the Rupiah has depreciated. [5] • High inflation in US has prompted the Fed to increase interest rates in US (“Fed tighten its monetary policy”) has led to hot money outflow from Indonesia to US / lesser hot money inflow into Indonesia [1], where investors seek to get a better return on their short-term investments. This leads to an increase in supply of Rupiah in the foreign exchange market or decrease in demand for Rupiah [1]

3 • The war in the Middle East has also triggered “capital outflow from developing countries” [1], further increasing the supply of Rupiah, which further contributes to a depreciation of the rupiah [1]. • Use DD-SS diagram to illustrate fall in value of Rupiah 1 mark – link increase in interest rates to capital outflow out of Indonesia 1 mark – link war in Middle East to capital outflow out of Indonesia 1 mark – link capital outflow to an increase in SS of rupiah in Forex 1 mark – link to a depreciation of the rupiah 1 mark – diagram (ii) Discuss whether the depreciation of the rupiah is likely to bring more benefits or costs to the Indonesia economy. [8] Command Discuss whether – 2 Sided + Evaluative conclusion Content Effect on macro goals, AD/AS analysis Context Indonesia Approach R1 A depreciation of the rupiah would bring more benefit to Indonesia R2 A depreciation of the rupiah would bring more cost to Indonesia Evaluative conclusion Overall stand on whether the depreciation of the rupiah is more likely to bring more benefits or costs to Indonesia economy. R1: A depreciation of the rupiah would bring more benefits to Indonesia • With a depreciation of the rupiah, the price of Indonesia’s exports become cheaper in foreign currency, which makes its exports more price competitive, Quantity demanded will rise as foreigners will buy more exports from Indonesia. Price of imports in Rupiah will rise and Quantity demanded will fall as locals switch to domestically produced substitutes. Assuming |PEDx| and |PEDM| are greater than 1, (X-M) will rise • (X-M) rises → AD rises → Multiplied rise in RNY → economic growth → fall in unemployment • There will also be more FDI as firms will find it more attractive to invest with a deprecation of Rupiah → AD and AS effects • There are actual and potential growth. R2: A depreciation of the rupiah would bring more cost to Indonesia • However, price of imported inputs (e.g. raw materials for industries such as automotive, electronics, textile and pharmaceuticals) increase in terms of the rupiah. This would increase the cost of producing exports for sectors that use imported raw materials → cost-push inflation

4 • Weak rupiah means the government needs more money to subsidise fuel since Indonesia is a net importer of oil → Will worsen the budget balance EV: • Depends on w hich effect outweighs the other. Given that a substantial number of export sectors in Indonesia make use of imported inputs, it is likely that the depreciation of the rupiah would bring more costs to Indonesia. • It depends on the extent to which the sector makes use of imported inputs in production of goods and services • Besides price, there are other non-price which affects Indonesia’s export competitiveness (quality of exports) •