CJC 2023 A-level CSQ2 ANS

2023 A Level H1 Economics – CSQ2 (Inflation and Technology) (a) With reference to Table 1 in Extract 5 (i) State the two months during the period from July 2020 to June 2021 when prices were at the lowest in Singapore. [1] November 2020 and December 2020. [1] (ii) Compare the inflation rate of Singapore to that of the US over the same period. [2] Similarity - From January 2021 to June 2021, both Singapore & U.S. had inflation that was generally increasing. [1] Difference: Singapore experienced deflation from July 2020 to Dec 2020 while the U.S. had inflation but was generally decreasing. [1] Note: There are other ways to rephrase the above that will probably be acceptable (key thing is to explain similarities and differences) Cambridge Examiner Report: (b) With reference to Extract 6, explain (i) why governments ‘embarked on unprecedented scale in fiscal stimulus spending’ during the pandemic [4] Severe macro problem from the pandemic: [1] During the pandemics, there was a fall in net exports, consumption expenditure (due to lockdowns and travel restrictions) & investments (poor sentiments) → resulting in a fall in AD which triggers successive rounds of fall in output, income, and income-induced consumption → multiplied fall in real national income via the reverse multiplier → significant negative actual EG. As real output falls → firms hired less factor inputs like labour / derived demand of labour falls → large increase in demand deficient unemployment. [1] With C, I and (X -M) all falling and thus potentially leading to severe recession/deflation → governments resorted to large fiscal spending to cushion / offset the extent of fall in AD . [1] The unprecedented scale in fiscal stimulus spending was meant to cushion and mitigate the fall in AD via the following (explain 1 will do) [1] 1. Through transfer payments → increasing disposable income → increase C 2. Through tax reliefs, subsidies helped to encourage an increase in investments → increase I 3. Through direct government spending on hiring and infrastructure spending → increase G

As AD = C+I+G+(X-M), the unprecedented rise in G will offset some part of the fall in C, I and (X- M), resulting in a smaller fall in AD and thus real national income → negative actual EG and demand-deficient unemployment by smaller extent. [1] Cambridge Examiner Report: (ii) how ‘an appreciation in the currency could potentially reduce the costs of imports in domestic currency’. [4] Definition of Appreciation: An appreciation in the country’s currency (eg SGD) means the value of it has now increased relative to other currencies (eg Ringgit). This means one unit of the SGD can buy more units of Ringgit than before. [1] Example: For example, if 1 SGD used to be exchanged for 3 RM, after appreciation, 1 SGD will now exchange for 3.5RM. [1] Explain how domestic price of imports is reduced: Theoretically, assuming the prices of imports from overseas is constant in foreign currencies (Ringgit), the appreciation of SGD against Ringgit will now mean the costs of imports in SGD is lower than before. [1] Explain why the fall in price of imports may be less than expected: However, the costs of imports might not fall given an appreciation of domestic currency as importers may be subject to pre-agreed contracts at domestic currency, or the importers do not pass down the lower costs to consumers. [1] Cambridge Examiner Report: (c) With reference to Extract 6 and using aggregate demand and aggregate supply analysis, comment on the likely impact on economies of countries where ‘interest rates were kept nearly zero’. [6] Positive impact on macroeconomics objectives When interest rates were kept nearly zero, it will have impact on various macroeconomics goals. As mentioned in Extract 6, the low interest rate

- incentivised households and firms to borrow freely. As the low interest rate leads to low returns to savings and low opportunity cost of spending. Consumers will thus be more willing to spend than to save, hence consumption will increase. - With the low interest rate, more investment projects are profitable to undertake and thus, this encourages an increase in investment. With the increase in consumption and investment, AD will increase. Figure 1 Referring to the Figure above, this results in AD increasing, which can be seen as a rightward shift of ADo to AD1. Assuming the economy is not at full capacity, firms will employ more factors of production to increase production. This causes the increase in national income, which will increase income -induced consumption and result in further increase in AD. This tri ggers successive rounds of increases in national income and income -induced consumption. At each round, the increase in both gets smaller. The multiplier process ends when the increase in national income is too small to generate further increase in income -induced consumption. This results in a multiplied increase in RNY from Yo to Y1. This helps the economy to achieve actual economic growth. With the rise in production, the derived demand for all factors of production includes labour increase. Thus, demand deficient unemployment decreases, achieving a lower unemployment rate. Negative impact on macroeconomics objectives If the increase in AD is sustained, then demand pull inflation might result. Assuming economy moves closer to full employment, factors of production are now scarce. The increase in production will cause greater competition for scarce resources which increase factor prices. Firms will therefore be willing to sell additional units only at a higher price (shown by a movement up the AS curve). The persistent increase in AD will lead to further increase in GPL and resulting in demand- pull inflation. P0 P1 AD0 AD1 0 Y0 Y1 YF1 RNY AS0 General Price Level

Cambridge Examiner Report: (d) Extract 7 states ‘Many activities that workers carry out today have the potential to be automated’. Explain why automation may benefit some groups of workers more than others. [5] Skilled Workers Automation and technological advancements create a higher demand for skilled workers, such as software developers, engineers, and technicians. [1]. The increase in demand leads to a higher wages and potentially more employment opportunities for skilled workers as the equilibrium quantity of workers increases. [1] Less skilled Workers Automation tends to replace tasks that are repetitive and don't require specialized skills, which are often the domain of unskilled workers. This leads to a fall in demand for low skilled labor, as machines and technology take over these tasks. [1] The new equilibrium in the market for unskilled labor is characterized by lower wages and higher unemployment rates for these workers as the equilibrium quantity of workers falls. [1] With increased automation, low skilled workers displaced due to automation may not be able to find jobs in expanding industries due to mismatch of skills resulting in occupational immobility and therefore may experience an increase in structural unemployment. [1] Cambridge Examiner Report:

(e) With reference to Extract 7 and 8, comment on whether these technological shifts ‘create considerable uncertainty, alongside the potential benefits’ for the economy. [8] Command Comment - Two-sided answer with a well -reasoned stand with evaluative insights. Content Macro impact on economic growth, unemployment and price stability from technological enhancement Context Economy. Approach Introduction R1: Unintended Consequences: explain how technology will lead to structural unemployment. Ev of R1: Extent of negative impact depends on extent & effectiveness of retraining and reskilling programmes R2: Benefits: explain how technology will lead