2016 JC1 Yearend Exam_H2 Answers

TPJC/2016 JC1 Yearend Exams_H2 Econs 1 Section A Case Study Q1 Suggested Answers: (ai) Define the term “real Gross Domestic Product (GDP)”. [2] Real GDP refers to inflation-adjusted value [1] of all final goods and services produced within the geographical boundary of a country during a specific period of time. [1] (aii) Using Figure 2, compare the trend between Japan’s real and nominal GDP from 1995 to 2015. [2] Difference 1: From 1995 to 2015, real GDP increased while nominal GDP decreased. Difference 2: From 1995 to 2005, real GDP was lower than nominal GDP. However, after 2005, real GDP became higher than nominal GDP. (b) Given the information contained in Table 1, describe what has happened to the General Price Level in 2012. [1] The General Price Level fell in 2012 as shown by the negative inflation rate of -0.03%. (c) Using AD/AS analysis, explain how the intended measure undertaken by the Japan’s Prime Minister can spur Japan’s economic recovery. [5] Identify & explain AD component: Identify evidence: Extract 1 states that the Prime Minister intent to “focus on higher growth” by increasing spending on infrastructure to “steer the country’s struggling economy away from deflation”. Explain the impact on AD: The increased spending on infrastructure will cause gov ernment expenditure (G) to increase and since G is a component of AD where AD= C+G+I+(X-M), this will cause AD to increase as well, ceteris paribus. AD curve shifts to the right from AD1 to AD2 as shown in the diagram below.

TPJC/2016 JC1 Yearend Exams_H2 Econs 2 Diagram: Explain diagram (using the multiplier effect): As AD increases, ceteris paribus, firms will experience a fall in inventories. This signals to firms to step up on production. Subsequently, firms will hire more workers, leading to increasing output, resulting in falling u nemployment and increasing income. As income increases, spending by the households will increase. As one’s spending becomes another’s income, this rise in spending will lead to an increase in income of another group of people because of the increasing demand for the goods and services they produce. Overall, the multiplier ( k) effect is triggered off, leading to multiple increases in production, output and national income, leading to expansionary effects on the economy. Thus, the AD increases from AD 1 to AD2, and real national income increases from Y1 to Y2. Link back to the question : Hence, the increase in government spending on infrastructure in Japan could spur Japan’s economic recovery.

TPJC/2016 JC1 Yearend Exams_H2 Econs 3 Question 2 The market for oil Suggested Answers & Mark Scheme (a) With reference to Figure