TMJC 2023 A Level H2 CSQ2 AP Answers

2023 A Level H2 Economics (9570) Suggested Answers to Paper 1 CSQ 2 © TAMPINES MERIDIAN JUNIOR COLLEGE Question 2: Economic Impact of an ageing population (a) With reference to Extract 5: (i) calculate and compare the old-age dependency ratio for Singapore in 1990 with that in 2020. [3] Old-age dependency ratio = Residents aged 65 years and over per 100 residents aged 20-64 years Calculation Old-age dependency ratio (1990) = 164000 ÷ 17200 ≈ 10 (1m) Old-age dependency ratio (2020) = 614000 ÷ 26260 ≈ 23 (1m) Compare Old-age dependency ratio in 2020 is 2.3 times (1m) that of 1990’s. (ii) explain one reason for the change in the old-age dependency ratio for Singapore between 1990 and 2020. [2] Note: Since o ld-age dependency ratio is the ratio of r esidents aged 65 years and over to per 100 residents aged 20 -64 years. An increase in old-age dependency ratio could be due to (1) increase in number of residents aged 65 years and over and/or (2) decrease in residents aged 20-64 years. From Extract 5, a possible reason could be the ageing population (1m) in Singapore which has resulted in the significant increase in the number of elderly aged 65 years and over. This increase in ageing population is likely to be at a higher rate than labour force since there is slower labour force growth which implies that the number of residents aged 20-64 years is increasing at a decreasing rate (1m). (b) Explain how the changes in the populations of countries shown in Figure 3 might affect aggregate supply and aggregate demand in those countries. [4] In Figure 3, it is projected that populations will decline in these countries. The decline in population may cause AD and AS in these countries to fall. A declining population would mean lesser number of domestic consumers and a larger proportion of elderly as compared to the young . Elderly consumers would be more cautious in their spending, as they expect incomes to fall drastically as they near retirement age, or those who are retired and no longer earning an income cut back on expenditure for expected rise in future health expenses. This, coupled with the overall fall in number of consumers would cause consumption expenditure to fall . Since AD=C+I+G+(X-M), AD falls , ceteris paribus.

2023 A Level H2 Economics (9570) Suggested Answers to Paper 1 CSQ 2 © TAMPINES MERIDIAN JUNIOR COLLEGE The decline in population would result in a smaller & older working population which can cause wages to rise and productivity to fall which would increase the costs of production as well as reduce the productiv e capacity of the economy. This would cause the AS of the country to fall i.e. a shift of the AS curve to the left. 2m: Explain fall in AD 2m: Explain fall in AS (c) With reference to Extract 5, explain why firms may choose ‘to cut investment in the domestic economy substantially, even as interest rates fall’. [3] A fall in interest rates will reduce the cost of borrowing which will incentivise firms to increase investment as previously unprofitable projects become profitable. (1m) However, an ageing population could suggest lower spending as lesser people are in the workforce while more retire and earn zero income. Thus, if firms think that “output and consumption growth will slow in response to an ageing population”, firms may expect the demand for the goods and services to rise slightly or even decrease, resulting in lower revenue an d ceteris paribus, lower profits. (1m) Hence, despite the fall in interest rates, firms may choose to cut investment substantially if “firms become pessimistic”, and the fall in expected returns to investment due to slowing demand is deemed to outweigh the rise in profitability due to lowering of interest rates. (1m) (d) Discuss whether the benefits to an economy of having an ageing population outweigh the costs. [8] Introduction: An ageing population can bring about both benefits and costs to an economy. Requirement 1: Benefits to an economy of having an ageing population Rise in AD leading to actual growth It is stated in Extract 7 that “an economy with an ageing population can benefit from an accumulation of wealth and savings”. Having savings, the older in dividuals can draw upon it to finance their spending on areas such as healthcare and education i.e. consumption increases, and this will cause a rise in AD, ceteris paribus. Assume an economy is operating with limited spare capacity, the rise in AD will shift AD0 outwards as shown in Figure 1 below.

2023 A Level H2 Economics (9570) Suggested Answers to Paper 1 CSQ 2 © TAMPINES MERIDIAN JUNIOR COLLEGE Figure 1: This results in a shortage of real output as total spending exceeds total output. This leads to a fall in inventories and producers will increase output to meet demand. Thus, firms will hire more factors of production. The initial rise in AD will cause fu rther increases in output, income and consumption because one’s spending becomes another’s income. This is because the rise in income arising from the initial rise in AD causes a rise in income -induced consumption that results in a further increase in AD. A new equilibrium is reached at E1 where AD 1 = AS0. GPL increases to P1 while real output increases by a limited multiplied amount from Y0 to Yf0 as limited spare capacity is present. Real output increases from Y0 to Yf0 and the economy enjoys actual growth. Rise in AS leading to sustained growth Extract 5 also suggests that an ageing population can bring more capital per worker leading to rising productivity. As labour force growth slows and firms face a shortage of workers, they may have to turn to machinery and automation to sustain their production. Hence, there could be higher capital to worker ratio and thus higher productivity. The increase in quantity of capital and quality of resources would increase the productive capacity, causing AS to shift to the right from AS0 to AS1 as shown in Figure 1. When AS increase from AS0 to AS1, potential growth occurs as shown by an increase from Yf0 to Yf1. There is also a further rise in real output from Yf0 to

2023 A Level H2 Economics (9570) Suggested Answers to Paper 1 CSQ 2 © TAMPINES MERIDIAN JUNIOR COLLEGE Y1 and fall in GPL from P2 to P3. The economy can enjoy sustained growth i.e. non-inflationary growth. Requirement 2: Costs to an economy of having an ageing population However, an economy having an ageing population faces costs as well. Firstly, as stated in Extract 5, with an ageing population there will be a s train on a government’s budget as the government will increase its spending on transfer payments “in the form of pensions, health care, and long -term care” as populations age. When the government spending exceeds its revenue, the government will incur a budget deficit. If the government is unable to finance the increase in spending on transfer payments by current taxes or drawing from its past savings or reserves, the government may have to resort to raising tax rates on income. Fall in AD leading to negative growth Raising personal income tax would decrease the disposable income of working adults and lower purchasing power. Assuming normal goods, there would be a fall in consumption expenditure. In addition, raising