RI 2025+Macroeconomics+Aims+Issues+PoliciesT2W8%28Mark+Scheme

T2W8 Class Test 4 Macroeconomics Aims, Issues & Policies - Mark Scheme © Raffles Institution 1 T2W10 Class Test 4 (Thursday Group) Macroeconomic Aims, Issues & Policies Mark Scheme The Covid-19 pandemic led to border lockdowns creating supply chain disruptions. Many governments fear that there could be a world-wide recession as spending falls. (a) Explain how the Covid-19 pandemic may affect economic growth and balance of trade of a small and open economy such as Singapore. [10] (b) Discuss whether the Singapore government should use fiscal policy alone in managing the economy when faced with a recession. [15] Part (a) Introduction ▪ Smallness refers to ▪ limited land and thus lack of natural resources ▪ small population and thus small domestic market [C as relatively smaller % of GDP] ▪ Being small leads to need to be open: ▪ reliance on imported raw materials and even foreign labour ▪ reliance on exports as engine of growth [X as 200% of GDP] Development R1: Economic Growth measured by year-on-year % change in real GDP On AD: ▪ Covid-19 led to pessimism and people cut down on spending as they fear a looming recession. Furthermore, strict lockdowns lead to less consumption at restaurants and entertainment outlets. Border lockdowns also make it difficult for goods to reach foreign consumers. ▪ In all, the fall in C and X causes a fall in AD. Being open, the fall in X will have an adverse impact on Singapore’s AD. ▪ Using an AD-AS diagram, show the multiple shifts in AD curve to the left.

T2W8 Class Test 4 Macroeconomics Aims, Issues & Policies - Mark Scheme © Raffles Institution 2 ▪ The fall in AD works through the reverse multiplier to reduce real GDP by more than proportionate. One man’s fall in spending leads to less income for the next person. The process goes through many rounds of fall in induced consumption to reduce real GDP. ▪ With reference to Figure above, the AD curve shifts finally from AD0 to AD1. The result is either a slow-down in actual growth or in a worse-case scenario – negative GDP growth rate. On AS: ▪ goods and [sometimes] labour cannot move across borders due to government restrictions for fear of Covid-19 transmissions ▪ total restrictions or delay in shipments lead to shortages of raw materials and labour – causing rise in prices ▪ being open, the rise in import prices causes rise in production cost leading to a fall in AS ▪ Use AD-AS diagram to show how the upward shift of the horizontal and upward sloping portion of the AS curve causes a rise in GPL – known as imported cost-push inflation ▪ Due to the rising inflation, households and foreigners cut down on spending ▪ The upward movement along the AD curve leads to a fall in real GDP – thus negative growth. [Acceptable idea – but not required - no extra credit given] ▪ Answers can link to a fall in productive capacity as quantity of raw materials and labour fall