TMJC 2022 A Level H2 EQ4

2022 A Level H2 Economics Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE Essay Question 4: During the pandemic, there was a fall in investment and a rise in unemployment. Innovation-based investment is a good way to stimulate the economy but, unless appropriate government policy action is taken, this might lead to another type of unemployment. (a) Explain how a fall in investment might lead to one type of unemployment while a rise in innovation -based investment might lead to a different type of unemployment. [10] (b) Discuss the extent to which a rise in Singapore government spending on investment in major capital projects and in human capital are both required to reduce unemployment in a post-pandemic world. [15] Suggested ans (a) Introduction Define unemployment: Unemployment level (of labour) refers to the number of people in the working age population who are actively looking for work but are without a job. A fall in investment would result in demand-deficient unemployment which occurs when there is inadequate demand for a country’s goods and services, which results in an excess supply of labour at the existing wage rate. On the other hand, a rise in innovation -based investment would lead to structural unemployment which occurs when there is mismatch of skills between the unemployed and the job opportunities available. Development Devt 1: Explain how a fall in investment leads to unemployment A fall in investment expenditure leads to a fall in aggregate demand (AD) since AD = C + I + G + (X-M). This results in a surplus and a rise in inventories at the original general price level which signals to producers to decrease output. This creates a downward pressure in GPL. The fall in income from the initial fall in AD causes a fall in income - induced consumption resulting in a further decrease in AD. As one’s reduction in spending reduces income of another there will be multiple decreases in AD until a new equilibrium is reached, whereby real output falls by a multiplied amount. The fall in real output would imply that firms cut back on their production. As demand for labour is a derived demand, the aggregate demand for labour falls to ADL2 as shown in Figure 1. Assuming wages are sticky downwards due to contractual agreements, real wage remains at W 1 creating an excess supply of labour . Demand-deficient unemployment results and is represented by the gap LDLs.

2022 A Level H2 Economics Suggested Answers to Paper 2 EQ4 © TAMPINES MERIDIAN JUNIOR COLLEGE Figure 1: Demand-deficient unemployment Devt 2: Explain how a rise in innovation -based investment would lead to unemployment However, on the other hand, a rise in innovation -based investment would lead to structural unemployment. Innovation-based investment could lead to adoption of more advanced technology and new production processes that would require highly -skilled workers with the