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 2, summarise the changes in crude oil prices from April 2013 to June 2016. [2] Overall trend [1] Overall crude oil prices showed a falling trend Refinement [1] A steep fall in oil prices was seen in the second half of the year in 2014 OR reaching a low of US30 per barrel at end of 2015 before rising to US$50 per barrel in June 2016. (b) Identify and explain the two factors that caused the market price of oil to decrease after mid-2014. [4] The 2 factors are weak economic growth and surging US production of oil. As many countries are experiencing weaker economic growth, these countries will also face falling production activities. Thus demand for oil falls as less are required to generate electricity for production. The fall in demand for oil, ceteris paribus will lead to a fall in the price of oil. The surging US production is due to technological improvement. Technological improvement has enabled countries such as United States to extract gas and oil from shale formation using fracking at a lower unit cost. This increases the supply of oil, leading to a fall in the price of oil, ceteris paribus. Each well-explained factor will be awarded 2 marks. (c) Based on the prediction by the International Monetary Fund on the revenues of OPEC in Extract 3, explain what this might imply for the price elasticity of demand for oil? [2] A fall in the price of a good with a price inelastic demand, ceteris paribus, will lead to a less than proportionate increase in its quantity demanded leading to a fall in its total revenue.[1 mark] Since it is stated in Extract 3 that IMF predicted the revenue of OPEC to fall by $300b in 2016 “if oil prices continue its downward trend”, this will imply that the demand for oil is price inelastic. [1 mark]

TPJC/2016 JC1 Yearend Exams_H2 Econs 4 (d) To what extent is OPEC guided by profit-maximisation in its pricing and output decisions? [4] The main aim of a firm is assumed to maximise profits but a firm can have other aim such as to increase market share. OPEC’s actions is not guided by profit-maximisation in the short run OPEC is a cartel where its member countries explicitly agree to cooperate in setting prices and output levels of oil, behaving as one big monopoly in setting the price and the output to maximise their total profit. However, the “surging US production of oil growth” from fracking with reference to Extract 2, has posed as a threat to the monopoly power of OPEC. In face of increasing competition, it is stated in Extract 3 that OPEC’s short-run aim is to “force some higher cost producers to shut down”. The main aim of OPEC is still to maximise profits in the long run In the longer run, it is stated in Extract 3 that Saudi Arabia, the key member in OPEC hopes to increase in its market share. Once OPEC can regain their market power by getting rid of their rival firms, they can then restrict output to limit the market supply to drive prices above the competitive levels to maximise profits. That is ultimately in the long run, the main of OPEC is still profit-maximisation. Full 4 marks to be awarded when a candidate is able to: • recognise a firm can have other aims besides profit maximisation. • use data to explain why OPEC may not aim to maximise profits in the short run but profit maximisation is still its goal in the long run. Candidates can also question the ability of OPEC to maximise profits given that imperfect information exists in the real world.

TPJC/2016 JC1 Yearend Exams_H2 Econs 5 (e) With reference to the given data, discuss whether a high profit earned by firms is necessarily bad for the consumers. [8] Introduction: The main aim of a firm is assumed to be profit-maximising. High profits earned by a firm can arise from high revenue earned by the firm and keeping costs low. Development: Thesis: A high profit earned by firms is bad for the consumers How are the high profits obtained? If the high profits are achieved via collusion, this can be undesirable for the consumers. When firms collude, they can achieve greater market power. High revenue can be earned by restricting output to charge high prices. If the demand for the product is price inelastic, an increase in price, ceteris paribus will lead to a less than proportionate fall in its quantity demanded. This increases total revenue. Holding costs constant, profits will increase. Producers gain at the expense of consumer where consumer surpluses are passed to producers. Furthermore when firms earn high profits, this also creates the problem of unfairness or inequity as these high profits go to shareholders who may be mainly upper income earners and therefore worsen the level of income inequity in the economy. Reference to Extract 4, an increase in profits from “engaging in anti- competitive behaviour” is considered a violation o