TMJC 2023 A Level H2 EQ4 AP Answers

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE The exchange rate is a key policy tool in managing the economy of Singapore. a) Explain how an appreciation of the exchange rate might affect aggregate demand and aggregate supply in an economy. [10] b) Discuss whether management of the exchange rate is the most appropriate way of controlling inflation in Singapore. [15] Question Interpretation for part ‘a’: Command Word: “Explain how” → Define, Illustrate, Elaborate Cue Words/ Key Economic Concepts: • “appreciation of the exchange rate” → increase in external value of currency • “affect AD and AS”→ link to AD-AS analysis i.e. AD & AS  or  Requirement (1): Impact of appreciation of exchange rate on AS Requirement (2): Impact of appreciation of exchange rate on AD Introduction Appreciation of an exchange rate refers to an increase in the external value of a currency. An appreciation will impact both aggregate demand (AD) and aggregate supply ( AS). This essay seeks to explain how an appreciation of exchange rate might affect AD and AS in an economy. Body/ Development Requirement (1): Impact of appreciation of exchange rate on AS An appreciation of domestic currency will make imported raw materials cheaper which can lead to a fall in unit cost of production of final goods and services for domestic firms. Hence, firms in the economy are willing and able to increase production at every price level, causing a rightward shift of the AS curve from AS1 to AS2 as seen in Figure (1) below. Figure (1): Rise in SRAS due to appreciation

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE Requirement (2): Impact of appreciation of exchange rate on AD Impact on export revenue: On the other hand, a n appreciation of domestic currency will lead to a rise in price of exports in terms of foreign currency. The rise in price of exports will cause foreigners to decrease their demand for the country’s exports as long as price elasticity of demand for exports is more than zero (i.e. PEDx>0) leading to a decrease in export revenue (X) measured in the domestic currency. Impact on import expenditure: At the same time, an appreciation of domestic currency will lead to a fall in price of imports in the domestic currency. With a fall in price of imports, quantity demanded of imports increases as domestic consumers would now switch their consumption away from domestically produced goods, thereby decreasing domestic consumption (Cd). The larger the XED value i.e. the closer the degree of substitutability , the greater the decrease in Cd. If PEDm>1, a fall in the price of imports brings about a more than proportionate rise in quantity demanded and leads to a rise in import expenditure (M). Assuming Marshall-Lerner condition where the sum of price elast icity of demand for exports and imports is greater than 1 i.e. PEDx + PEDm >1, an appreciation of the domestic currency will lead to a fall in the value of net exports (X-M). Overall impact: With a decrease in Cd and (X -M), this will lead to a decrease in AD from AD1 to AD2 , ceteris paribus, as shown in the Figure (2) below. Figure (2): Rise in AD due to appreciation Conclusion Overall, an appreciation will lead to a rise in SRAS and a decrease in AD.

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE Mark Scheme Level Knowledge, Application, Understanding, Analysis Marks L3 • Analytical explanation of impact on AD and impact on AS due to appreciation of domestic currency. 8-10 L2 • Limited rigour in analysing impact on AD and impact on AS due to appreciation of domestic currency. • Unbalanced analysis e.g. only 1 requirement is explained • Inaccurate analysis/ analysis has missing gaps 5-7 L1 • Largely descriptive • Some knowledge of impact on AD OR impact on AS due to appreciation of domestic currency. 1-4

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE (b) Discuss whether management of the exchange rate is the most appropriate way of controlling inflation in Singapore. [15] Question Interpretation for part ‘b’: Command Word: “Discuss” → Thesis, Antithesis, Synthesis (TAS) Cue Words/ Key Economic Concepts: • “management of exchange rate” → gradual and modest appreciation • “controlling inflation” → slow down the increase in price • “Singapore” = context Requirement (1): Management of exchange rate is the most could be an appropriate way of controlling inflation in SG Requirement (2): Other policies could also be appropriate in controlling inflation in SG Introduction Inflation refers to a sustained increase in the GPL. Once high inflation sets in, it creates negative impacts on the economy, such as a fall in material standard of living (SOL) and a fall in export - price competitiveness. As a small, open economy, Singapore’s external demand makes up two-thirds of the aggregate demand, i.e. external demand is the driving force of the economy. The aim of monetary policy in Singapore therefore is to achieve some targeted exchange rate that wi ll allow the external demand and AD to increase at a non-inflationary pace and to keep imported inflation at bay. Hence, it is imperative for the Singapore government to control inflation via appropriate policies. This essay seeks to discuss whether management of exchange rate via gradual and modest appreciation is the most appropriate way of controlling inflation in Singapore. Body/ Development Requirement (1): Management of exchange rate could be an appropriate way of controlling inflation in SG Step (1): What the policy is about Exchange rate policy involves the deliberate attempt by the Central Bank (MAS in Singapore) to manipulate the external value of a country’s currency in order to influence the economy. For example, the Central Bank can deliberately appreciate its domestic e xchange rate by selling foreign currencies in the foreign exchange market to overcome inflation due to external factors. Step (2): How the policy works Explain how appreciation of S$ dampens demand -pull inflationary pressures that arises from excessive increase in external demand

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE With an appreciation of S$, the domestically produced goods for exports become relatively more expensive in foreign currencies. As such, it loses its export price competitiveness in the international market. Assuming PEDx>0, foreigners will demand less of Singapore’s exports, resulting in a fall in export revenue (X) measured in S$. As seen in part (a), the appreciation of S$ will also cause import expenditure (M) to rise. Assuming Marshall-Lerner condition where the sum of price elasticity of demand for exports and imports is greater than 1 i.e. PEDx + PEDm >1, an appreciation of SGD will then lead to a fall in the value of net exports. Thus, a stronger S$ can help to dampen the rise in AD in Singapore easing inflationary pressure due to rising external demand as shown in Figure (2) above in part ‘a’. Explain how an appreciation of S$ addresses imported cost-push inflation in Singapore When the Monetary Authority of Singapore (MAS) appreciates its Singapore dollar (SGD), it can lower inflation rate by lowering imported cost -push inflation. A rise in the external value of SGD will make imported raw materials cheaper which can lead to a fall in unit cost of production of final goods and services for domestic firms. Hence, firms in the economy are willing and able to increase production at every price level, causing a rightward shift of the AS curve from AS1 to AS2 as seen in Figure (1) in