2026 Aims Issues 26 Policies T2W8 Class Test 4 Mark Scheme

1 Macroeconomic Aims Issues and Policies 2026 Term 2 Week 8 - Class Test 4 The Covid-19 pandemic led to border lockdowns and global supply chain disruptions, forcing many firms to adjust production and restructure their operations. The outcome was recession as Singapore's GDP contracted by 4.1% and a rise in the unemployment rate to 4.1% in 2020. a) Explain how these developments could lead to an increase in both demand-deficient unemployment and structural unemployment in Singapore. [10] b) Discuss whether the Singapore government should adopt fiscal policy or monetary policy centred on exchange rate when faced with a recession. [15] Suggested mark scheme Part (a) Introduction: • Identify that unemployment rate refers to the percentage of labour force who is willing and able to work but unable to find work. • Define demand deficient unemployment • Define structural unemployment Body Requirement #1: Pandemic  demand deficient unemployment rise i) Pandemic leads to fall in AD (student should explain 2 channels in which AD is reduced) • Explain how the pandemic/event led to a fall in AD via fall in autonomous C, I and X: • Fall in autonomous C: Lockdowns, fear of infection and reduced mobility discourage households from spending on non- essential goods and services such as travel, dining, retail and recreation. At the same time, households may fear job loss or future income loss, causing consumer confidence to fall. They may increase precautionary savings and reduce current consumption. Hence C falls. • Fall in I: Firms facing weaker sales, unused capacity and uncertainty over future demand postpone investment in capital goods, renovations and expansion plans. Hence I falls. • Fall in X: If the pandemic causes a world-wide recession, trading partners' real national income falls. Their households and firms have less purchasing power, reducing demand for the country's exports. Border closures also reduce tourism and travel-related exports. Hence X falls. • Since AD = C + I + G + (X - M), the fall in C, I and X cause AD to decrease. In an AD -AS diagram, AD curve shifts left from AD 0 to AD1. ii) Fall in AD leads to rise in demand deficient unemployment • At the initial GPL, aggregate supply is greater than aggregate demand, so firms experience unintended accumulation of inventories/stocks. • To clear excess stock, firms cut production. Real national output falls from Y 0 to Y1.

2 • B e c a u s e l a b o u r i s a d e r i v e d d e m a n d , a f a l l i n o u t p u t r e d u c e s fi r m s ' d e m a n d f o r labour. Qty of workers hired is reduced as firms may retrench part of their workforce. • The reverse multiplier process deepens this effect: Principle – one man’s spending is another man’s income . The reduction in AD causes the reduction in income for others. Retrenched workers reduce consumption further, causing additional rounds of falling AD and the outcome of a more than propor