TMJC 2022 A Level H2 EQ2

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Essay Question 2: The Singapore government announced in the 2018 Budget that the goods and services tax (GST) would rise from 7% to 9% sometime between 2021 and 2025. The intended consequence of this change is to raise tax revenue. However, following the coronavirus (Covid -19) outbreak in 2020, the incomes of many households fell. (a) With the aid of diagrams, explain why an increase in GST and a fall in the incomes of many households are each expected to cause a fall in expenditure on luxury goods. [10] (b) Discuss whether the increase in GST is likely to raise tax revenue and whether it will lead to unintended consequences. [15] Part (a): Command word/phrase With the aid of a diagrams, explain why To utilise economic diagram(s) and economic reasoning (demand, supply , and price elasticities) to explain the changes on consumer expenditure (CE) Content Increase in GST Fall in incomes of many households Expenditure Show understanding of the concept of taxation and its impact on CE with application to PED. Explain impact of changes in income on CE with application to YED. CE = P x Q Context Luxury goods PED for luxury goods is likely to be greater than 1. YED for luxury goods is likely to be greater than 1. Suggested Answer: Introduction Consumer expenditure is the product of price and quantity. How an increase in GST and a fall in the incomes of many households will impact consumers’ expenditure (CE) on luxury goods is dependent on the shifts of demand or supply, and also relevant elasticity concepts such as price elasticity of demand (PED) and income elasticity of demand (YED). ✓ T: Defined CE ✓ R: Addressing intent of Qn

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Two Requirements: 1. Impact of an increase in GST on expenditure of luxury goods a) Explain the change in CE due to changes in SS factor: o GST is an indirect tax paid through the producers / sellers on the consumers’ behalf. o ↑GST by 2% points → ↑unit COP of luxury goods → ↓ supply of luxury goods from S1 to S2 as shown in Figure 1 → shortage occurs at initial price OP1 which exerts an upward pressure on prices →↑price of luxury goods from P1 to P2 & ↓Quantity from Q1 to Q2 where the market clears → the changes in CE depends on PED. Figure 1: o PED refers to the degree of change in quantity demanded in response to a change in the price of the good, ceteris paribus. PED differs between goods and for a specific good, between consumer groups, determined by extent of substitutes, importance in consumption and consumers’ income. o Demand for luxury goods such as electronic products can be considered pr