TMJC 2022 A Level H2 CSQ1

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE Question 1: Economic problems caused by drought and the coronavirus (COVID - 19) pandemic (a) Use a supply and demand diagram in each case to explain why: (i) the price of fresh fruit and vegetables in Australia has risen as a result of the drought. [2] The drought in Australia will mean no or insufficient water for the growth of fruits and vegetables. This will lead to a fall in the supply of fresh fruit and vegetables from S1 to S2 as shown in Figure 1 below. At the original price OP1, there will be a shortage of Q3Q1 of fresh fruit and vegetables, and this will exert an upward pressure on the price causing it to rise from OP1 to OP2. Accurately labelled diagram – 1m: Figure 1: (ii) International tourist arrivals into Australia are expected to fall as a result of the bush fires. [2] The “smoke haze and uncertainty about safety” due to the bush fires have caused a change in taste and preference against travelling to Australia . This will cause the demand for tourist arrivals to Australia to fall. As shown in Figure 2 below, the demand curve will shift from D1 to D2. The equilibrium quantity of international tourist arrivals falls from Q1 to Q2.

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE Accurately labelled diagram – 1m: Figure 2: (b) With reference to the data, explain one possible reason for the change in Australia’s budget balance from February to June 2020. [2] Australia’s budget balance changed from a budget surplus to budget deficit. This is because the Australian government increased government spending as a fiscal stimulus to boost aggregate demand so as to help the economy to recover from falling GDP due to the negative impacts of bushfires (Extract 2) and the coronavirus shock (Extract 3). Assuming no change in government’s revenue, the large increase in government expenditure would cause the budget balance to go into a deficit. (c) With reference to Extract 2, explain why a nominal interest rate of 0.25% in March 2020 would be described as being ‘negative’ in real terms. [2] Real interest rate is the nominal interest rates adjusted for inflation. [1] With reference to Extract 2, t he interest rate is 0.25% and inflation rate is 2.2% as reflected by the change in consumer price index . Real interest rate is negative because 0.25-2.2 = -1.95%. [1] OR Real interest rate is negative as inflation rate is higher than the nominal interest rate. (d) Explain how a negative interest rate is likely to affect savings by consumers and the exchange rate in Australia. [4] Negative interest rates meant that interest rates fall below 0%. This decreases interest earnings and decrease s the opportunity cost of spending. [1] This decreases savings by consumers. [1]

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE With negative interest rates, there is also less hot money inflow into Australia [1]. This will lower the demand for Australian dollar which will lower the exchange rate in Australia (i.e. Australian dollar depreciates). [1] OR There is more hot money outflow from Australia seeking for higher interest rates elsewhere. This will increase the supply Australian dollar which will lower the exchange rate in Australia (i.e. Australian dollar depreciates). [1] (e) Given the weakening of Singapore’s exchange rate, discuss whether a stronger exchange rate would be of overall benefit to Singapore when “the global economy is in deep recession’ (Extract 4). [8] Introduction: Singapore (SG) is a small and open economy. It is import -reliant due to lack of natural resources and is export -driven due to small domestic demand because of small population size. In general, SG’s monetary stance is to have a modest and gradual appreciation of the Singapore dollar (S$) so that its external demand and AD can increase at a non -inflationary pace and to keep imported inflation at bay. However, in times of a global economic downturn such as in the given current economic situation, SG has allowed its S$ to weaken. In this essay, we will discuss whether a stronger exchange rate would be of overall benefit to Singapore when “the global economy is in deep recession’. Development 1: A stronger exchange rate would be of benefit to Singapore when “the global economy is in deep recession’. As Singapore is highly dependent on imports, a stronger S$ will make imports cheaper in S$. A fall in price of imports means imported raw materials are now 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 diagram below. GPL falls from P1 to P2, hence reducing cost - push inflation and boosting economic growth as real output increases from Y1 to Y2.

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE Development 2: A stronger exchange rate would not be of benefit to Singapore when “the global economy is in deep recession’. However, SG is also highly dependent on exports for growth. When the global economy is in deep recession this would mean that SG’s trading partners are likely to face falling GDP. With a fall in income, demand for SG’s exports to these countries will fall leading to fall in SG’s export revenue. The fall in SG’s export revenue will be significant should the income elasticity of demand for these goods be positive and more than 1 as the demand for SG’s exports will fall by more than proportionately. Having a strong S$ in such times will cause an even larger fall in SG’s X. With a stronger S$, SG’s exports will become more expensive in the foreign currency. Assuming PEDx>0, demand for exports in SGD will fall, further exacerbating the fall in export revenue. In addition as imports become cheaper in SGD due to the stronger SGD, domestic households may substitute imports for domestically produced goods and services resulting in a fall in domestic consumption. AD will fall by an even greater extent , worsening SG’s economic recession. Hence a stronger S$ may not be of advantage to SG. Furthermore, in a severe global recession, imported inflation from a weaker S$ may be less of a concern as globally prices of goods and services in general may have fallen due to lack of demand arising from economic uncertainty. Singapore may also suffer from a BOT deficit as a result of a stronger SGD due to fall in X arising from a fall in price competitiveness of her exports as explained earlier, and a rise in M assuming PEDm > 1 causing a more than proportionate rise in the quantities imported in response to a fall in price of imports in SGD. Assuming Marshall-Lerner condition holds i.e., the sum of price elasticities of demand for imports and export is more than 1, the stronger SGD causes the BOT to decrease to a deficit assuming it was initially in equilibrium i.e. BOT = 0.

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE Conclusion: Criterion → Root cause of the recession [CORe] A stronger exchange rate may not be of overall benefit to Singapore when “the global eco