CJC 2020 A-level CSQ2 ANS

2020 A Level - CSQ 2 (a) Using the information available, compare the post -2008 performance of Italy and Singapore with respect to GDP, inflation and unemployment. [6] GDP GDP of Italy had always been higher than that of Singapore during the post -2008 period. [1] GDP of Singapore has increased post -2008 while that of Italy has decreased. [1] Inflation Both Italy and Singapore experienced deflation in at least one year. [1] Singapore experienced a larger magnitude of change in its inflation rate compared to Italy [1] OR Singapore’s inflation rate fluctuated over a larger range than that of Italy OR the highest inflation rate of Singapore is higher than that of Italy and its lowest inflation rate is lower than that of Italy. Unemployment Unemployment rate of Italy had always been higher than that of Singapore during the post-2008 period. [1] Unemployment rate of Italy has decreased post-2008 while that of Singapore has increased. [1] (b) (i) State the components of aggregate demand. [2] The 4 components of aggregate demand are consumption expenditure , investment expenditure, government expenditure and net exports (export revenue - import expenditure). (ii) With reference to Extract 4, explain how the US’s fiscal policy and the rapid economic growth of China contributed to the US’s economic recovery from its 2009 recession. [6] With the recession in 2009, it is likely that there is demand -deficiency and excess capacity observed in the US. Impact of US’s Fiscal Policy on economic recovery (i.e. rise in AEG)

US adopted expansionary fiscal policy with “tax cuts and increase in government spending”. As government increase spending on infrastructure developments, government expenditure (G) is a component of AD, AD increases as govt spending increases. [1] Tax cuts increases consumption (C) and investment (I) as disposable income and post-tax profits increase due to fall in income tax and corporate tax. C and I are components of AD, AD increases. [1] With the autonomous rise in G, I and C and assuming spare capacity, the initial increase in AD will trigger successive rounds of expansion in output, income, and income-induced spending, leading to a multiplied increase in real national income. [1] Impact of rapid e conomic growth of China on economic recovery (i.e. rise in AEG) Rapid economic growth in China lead to a rise in income of the Chinese, causing them to increase purchasing power and thus higher demand for goods and services, which includes that of imported goods from the US (assume normal goods). [1] China will also import more factor inputs from the US, such as oil, to make increasing amount of final goods. Therefore, demand for US’ exports increases, increasing its export revenue [1]. Assume constant import expenditure of the US, US’s net exports will rise , X-M increases, AD increases, leading to a multiplied increase in real national income as explained earlier. [1] (c) Explain the ‘consequences for employment and living standards’ Greece will have experienced as a result of its GDP falling significantly. [6] Consequence for employment as a result of GDP falling significantly [2] As GDP falls significantly, demand for factor inputs including labour will also fall [1] since the latter is derived from the demand for final goods and services. Therefore , derived demand for labour falls, causing demand-deficient unemployment to rise. [1] Consequence for living standards (i.e. mSOL and nmSOL) as a result of GDP falling significantly [4] Standard of living is defined as the well -being of the average person, both in terms material (access to quantity of goods and services) and non -material (intangible quality of life).

As Greece’s GDP fell significantly and assuming that the price level and population remained unchanged, a lower GDP level would lead to lower real GDP per capita. This would mean that there was a fall in average incomes [1] thus leading to a fall in purchasing power (i.e. lower level of consumption of goods and services), proving that material living standards had worsened. [1] Fall in GDP also means less tax revenue collected by government due to lower income and corporate profits, and leading to lower govt spending on education, healthcare provisions such as subsidies, maintenance of public hospitals etc [1] This will lead to a fall in access to quality healthcare and education facilities, causing non-material SOL to fall as life expectancy / literacy rates are compromised. [1] (d) Extract 6 relates to the policy of ‘austerity’ adopted, not always willingly, by some governments after the 2008 financial crisis. (i) Explain the benefits to the economies when governments adopted ‘deflationary policies’ and comment on whether the deflationary policies were justified. [7] Explain 2 benefits to economies via impact on macro goals [4m] ‘Deflationary policies’ will decrease Aggregate Demand via a reduction in its component [AD=C+I+G+(X-M)]. Benefit 1: Reduce size of government budget deficit for debt-ridden economies On the other hand, austerity measures are deflationary in nature as it involves a reduction in government expenditure and a rise in direct taxes (contractionary fiscal policy), thereby increasing tax revenue for the government, as evidenced in Extract 6. A fall in government spending with an associated rise in government revenue will improve the government budgetary position (i.e. a reduced size of budget deficit / debt). [1] The rationale for austerity measures undertaken by various governments in 2008 was to reduce the size of government budget deficit/debt to rebuild business confidence/economic sentiments amidst the global financial crisis, as well as the long term fiscal health of government in utilizing fiscal spending - both crucial for long term sustainable/inclusive growth (prudent government spending on green technology or skills-upgrading for disadvantaged groups). [1] Benefit 2: Boost confidence / economic outlook in the economy Another benefit of ‘deflationary policies’ is that they signal commitment of the governments to improve their budget position by reducing public debt, thus restore the stability in the economies. [1]

This might lead to improved investor confidence and they will expect higher future rates of returns, thus this can lead to an increase in investment. With the rise in AD, there would be a multiplied increase in RNY via the multiplier effect and in the long term there would be positive actual economic growth. [1] Comment if deflationary policies are justified [3m] Not justified: Unfortunately, it seems like the benefits of ‘deflationary policies’ were short-lived because despite the intended improved budget balance, ‘cuts in government spending’ in economies such as Greece, Italy and the UK meant that their people’s non -material S OL worsened since there were not enough funds to support the provision of facilities and amenities ‘closed libraries and unused care centres’. In addition, the fall in AD, through fall in G, C and I also meant that the national income was also lower, and assuming that prices remained the same, purchasing power fell suggesting that the material well -being of the people also worsened. This fall in national income also implied a fall in national output and hence fall in employment levels. All in all, the ‘deflationary policies’ were not justified because they seemed to have worsened the situation in the economies mentioned earlier. OR Justified: The need to restore financial stability and business confidence is paramount for the long term growth prospect for Greece, in spite of the recession. This is because the root cause of poor economic sentiment stemmed from the large unsustainable government debt, which discourages private inve