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 gr