RI 2025+Macroeconomic+Aims+Issues+%26+Policies+-+T2W8+Class+Test+4+%28Mark+Scheme%29+-+Friday+Group

T2W8 Class Test 4 Macroeconomics Aims, Issues & Policies - Mark Scheme © Raffles Institution 1 T2W10 Class Test 4 (Friday 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 Singapore’s unemployment rate and inflation rate. [10] (b) Discuss whether governments should adopt fiscal policy or manage interest rates when faced with a recession. [15] Part (a) R1: Pandemic → Unemployment Rate 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. ▪ 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 and causes loss of many indirect jobs. The result is a rise in cyclical unemployment since a fall in output leads to a decrease in demand for labour as a factor of production. On AS: The rise in unemployment is also caused by fall in AS. Supply-chain disruptions lead to rise in import prices causing production cost to rise. The fall in AS leads to inflation. Due to the rising inflation, households and foreigners cut down on spending. The downward movement along the AD curve leads to a fall in real GDP , thereby reducing the demand for labour – causing an increase in unemployment.

T2W8 Class Test 4 Macroeconomics Aims, Issues & Policies - Mark Scheme © Raffles Institution 2 R2: Inflation Rate [need both effects] 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 an open economy, the rise in import prices cause 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 On AD: ▪ As explained earlier, Covid-19 pandemic could have led to a fall in C and X. The fall in AD causes a leftward shift of the AD curve. As the economy moves from the upward sloping portion of the AS curve to the horizontal segment, the surplus of goods caus es producers to reduce pric