ASRJC 2020 H1 econs CSQ2 Suggested Answers

1 © Anderson Serangoon Junior College Economics Department H1 CSQ2 GCE A Level Examinations 2020 Suggested Answers (a) Using the information available, compare the post-2008 performance of Italy and Singapore with respect to GDP, inflation and unemployment. [6] Figure 1 shows a sligh t fall in GDP of Italy post-2008 to 2017 while Singapore experienced a slight increase in GDP. However, GDP of Italy was always greater than that of Singapore, indicating larger gross national output, which translates to larger amounts of goods and services for consumption and possibly higher material standard of living. Table 3 shows the inflation and unemployment rates of Italy and Singapore. Both countries’ inflation rate fell from 2013-2016 before increasing in 2017. Singapore experienced a longer period of deflation in 2015 and 2016 compared to Italy with only a year of deflation in 2016 , indicating greater price instability in Singapore which would adversely im pact firms’ investment decisions and hence economic growth in Singapore. There was consistently high unemployment rate in Italy whereas Singapore’s unemployment rate is consistently low thro ughout 2013-2017, indicating greater efficiency in resource utilisation in Singapore. [OR: Unemployment rate in Singapore was consistently lower than the rate in Singapore, by at least 5 times, indicating greater efficiency in resource utilisation in Singapore.] (b) (i) State the components of aggregate demand. [2] The components of aggregate demand (AD) include consumption expenditure, investment expenditure, government expenditure and net exports. (ii) With reference to Extract 4, explain how the US’s fiscal policy and the rapid economic growth of China contributed to the US’s economic recovery from its 2009 recession. [6] As highlighted in Extract 4, “a modest programme of tax cuts and increases in government spending” contributed to the US’s economic recovery. With a decrease in personal income tax rates, disposable income increases, consumers will increase their spending on goods and services, resulting in an increase in consumption expenditure and thus AD and real national output. Tax deductibility of interest payments allow for better financing conditions and recovery for many of the US citizens that are experiencing unemployment. With a decrease in corporate tax rates, there is higher after-tax profits for the producers. This may induce them to utilise the higher profits for investment projects thus increasing AD and real national output. Since G is a component of AD, an increase in G will raise AD. For instance, the US government may increase expenditure on infrastructure to impro ve the transport network or to provide more funding for building of public institutions such as schools and hospitals. This leads to an increase in AD and in turn increase real national output. With a rapid economic growth of China, there will be higher national income and therefore, higher household incomes. This will increase consumption of imported goods, leading to higher demand for exports in the US. This increase in demand for US’s export will lead to an increase in the total revenue of exports . For example. Given that China tries to improve productivity through automation and robotics, it is likely that China would import capital goods such as high -end microchips and machinery from US. US would then experience an increase in export revenue and an increase in AD and hence, via the multiplier, increase real national output from Y0 to Y1.

2 © Anderson Serangoon Junior College Economics Department Therefore, the increase in C, I G due to US’s fiscal policy and the increase in X due to the rapid economic growth of China have resulted in the US recovery from the 2009 recession. This is reflected by Extract 4 as it was mentioned that the US’ GDP had returned to level of 2007 by 2011. (c) Explain the ‘consequences for employment and living standards’ Greece will have experienced as a result of its GDP falling significantly. [6] As GDP fall s significantly, business confidence as well as household confidence will be adversely affected as firms face falling profits and increase risk of closing down. Firms cut cost by retrenching labour causing unemployment to rise. There will also be less new i nvestments as firms faced excess stocks as households were not spending due to increase fear of being unemployed. Thus with fall in investments and consumption, job creation would be limited and so the number of unemployed increased further. With GDP falling significantly, it would take a longer time for the economy to r ecover as well. Unemployment would then be pr olonged and the consequence would be a rise in structural unemployment as skills become obsolete. Living standards refer to the material and no n-material well-being of the population. The unemployed suffer ed loss in income and for those who were employed, income fell as firms cut wages since there is less demand for labour. A fall in income or loss in income will mean lesser purchasing power, leading to less consumption of goods and service. Hence, there will be a fall in material standard of living for both unemployed and the employed. As more businesses make losses, more shareholders would experience fall in income as no dividends would be paid out. Business owners would also experience fall in income as profits fell. This means that individuals would have less purchasing power and so their material wellbeing fell. This is shown by the fact that there is ‘increased use of charitable food donation s’, indicating that more people were unable t o afford the basic necessities of life. In addition, their non -material wellbeing also suffer ed. The falling GDP forced government to cut back on spending and so people could not access ‘closed libraries’ and ‘care centres’ (Extract 6). So there were fewer avenues for them to spend their leisure time. AS AD Real National Output General price level P0 Y0 E0 0 AD1 Y1 E1

3 © Anderson Serangoon Junior College Economics Department (d) Extract 6 relates to the policy of ‘austerity’ adopted, not always willingly, by some governments after the 2008 global financial crisis. (i) Explain the benefits to the economies when governments adopted ‘deflationary policies’, and comment on whether the deflationary policies were justified. [7] Deflationary policies refer to the government cutting back on spending and increasing tax rate s with the intention of cutting down on its net expenditure. BenefitsThe rationale for adopting such a policy by countries like Greece was to reduce their huge debt due to prolonged and large borrowing in the past. When debt is reduced, credit rating for the country would increase and this foster greater confidence and so attract greater inflow of investments. In addition, excessive governm ent spending and borrowing also resulted in crowding out effect as interest rates would be driven up due to an increase in the demand for loanable funds, causing investments and consumption to fall. Deflationary policy reverses the situation as less borrowing by the government would drive down interest rates and so stimulating rise in investments and consumption. The deflationary policy then is meant to shift government spending to the private sector to increase AD. With the increase in investments and consumption, and through the multiplier process, real GDP increase s followed by rise in employment. Thus, the country is able to recover from the recession. In addition, with greater private investments, the country ’s productive capacity would increase as the inflow of investments in new factories as well as the inflow of foreign talent would increase the quality and quantity of capital and labour leadin