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 proportionate fall in real NY . • As lower income and spending spread throughout the economy, firms in sectors beyond those initially affected also face weaker demand and may cut output and employment. • Hence, demand-deficient unemployment rises across many industries. Requirement #2: Pandemic  Structural Unemployment • The Covid-19 pandemic could have increased Singapore’s structural unemployment rate by creating a mismatch between workers’ skills and available jobs. • Lockdown measures, border restrictions and safe -management measures reduced demand for multiple sectors within the economy such as tourism, aviation, hospitality, retail and food services. • Firms in these sectors cut output or restructured, causing some workers to be retrenched. • At the same time, Covid-19 accelerated structural changes in the economy, such as: Increase in usage of e -commerce and digital payments away from traditional brick and mortar companies with customer facing staff. • Companies also increased automation in production to overcome the disruptions to labour supply. • Hence, labour demand shifted away from traditional customer -facing or routine operational roles towards jobs requiring digital skills and IT skills. • Even if there were job vacancies in expanding sectors, the retrenched workers might remain unemployed because their skills and experience did not match the requirements of the available jobs. • Therefore, Singapore’s structural unemployment rate could rise because Covid- 19 changed the structure of labour demand across industries and occupations. Knowledge, Application, Understanding, Analysis L1  Lack application of relevant economic framework and context  Critical errors in analysis  Significant conceptual gaps in explanation 1 - 4 L2  Some economic analysis for both requirements (R1 and R2) but with gaps or lapses in explanations  Some application of context and use of examples  Lacking in full scope of analysis 5 - 7 L3 A well-developed answer that demonstrates:  Rigorous analysis for BOTH requirements  Good scope of coverage  Good application of contextual examples 8 - 10

3 (b) Discuss whether the Singapore government should adopt fiscal policy or exchange rate policy when faced with a recession. Introduction: Clarification: Recession  at least 2 consecutive quarters of negative EG Requirement #1: Explain the use of Fiscal Policy to manage recession in SG Thesis: Exp Fiscal Policy  Manage the recession Discretionary expansionary fiscal policy refers to a deliberate increase in government expenditure and/or reduction in taxes to bring about the rise in the level of AD. Explaining how exp FP results in rise in AD The Singapore government could implement a rise in government expenditure such as increase spending on security and defence, public work projects (schools, transportation network, infrastructure) etc. Or the government c an cuts taxes, e.g. personal income taxes, this will increase households’ disposable income. Households will save some of this additional income, but they will spend some of it on consumer goods. The rise in G and C in these examples will lead to a rise in AD as AD=C+I+G+(X-M) Multiplier effect: An initial increase in government spending (assume exp FP is in G) raises aggregate demand (AD 0 to AD 1), p r o m p t i n g fi r m s t o b o o s t p r o d u c t i o n a n d h i r e m o r e w o r k e r s , thereby increasing national income (Y0 to Y1). These newly employed workers then spend more on goods and services, generating higher incomes and profits for other firms. This triggers further rounds of spending (AD1 to AD 2) and income generation, though each round becomes smaller due to leakages such as savings , imports and taxes . A s a r e s u l t , t h e o v e r a l l i n c r e a s e i n real national income is greater than the initial rise in Aggregate demand – helping Singapore recover from a recession. AT: Limitations of exp Fiscal Policy in SG • In Singapore, consumption (C) and government spending (G) form a relatively small share of aggregate demand compared to many larger economies. As a highly open economy, Singapore relies heavily on exports ( about 180% of SG’s GDP in 2024) , so increases in G or attempts to stimulate C have a more limited impact on overall demand, especially if external demand conditions are weak (covid pandemic ; X continues to fall). • Singapore’s multiplier effect is relatively small due to significant leakages from the c i r c u l a r fl o w o f i n c o m e . A l a r g e p r o p o r t i o n o f a n y i n c r e a s e i n i n c o m e i s s p e n t o n imports rather than domestically produced goods, which reduces the marginal propensity to consume domestically. As a result, successive rounds of spending are weaker, limiting the overall increase in national income from an initial fiscal injection.

4 EV#1: (in compa