2012 H1 Econs Prelims (Finalised)

1 © DHS 2012 Name: Index Number: Class: DUNMAN HIGH SCHOOL Preliminary Examination Year 6 Economics 8819/1 Higher 1 Section A Case Study Section B Essay 17 September 2012 3 hours Additional Materials: Writing Papers PLEASE READ THE FOLLOWING INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Please start on a fresh sheet of paper for a new question. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten all your wo rk securely into two separate bundles for Section A and Section B. The number of marks is given in brackets [ ] at the end of each question or part question. Circle the question number you have attempted. Section A Section B Q1 Q2 Q3 Q4 This document consists of 9 printed pages including this cover page. [Turn over

2 © DHS 2012 Section A Answer all questions in this section Question 1 Debt Time Bomb Extract 1: Public Finances in Dismal State European Union (EU) figures showed that public finances across Europe were in a dismal state after governments spent heavily to keep their economies afloat. The combined deficit for all 16 eurozone countries more than trebled in 2009 to 6.3 per cent of Gross Domestic Product (GDP) from 2.0 per cent in 2008, more than twice the level permitted under EU budget rules. Ireland was the worst offender, followed by Greece. There are fears that Greece's troubles in the international financial markets will trigger a domino effect, toppling other weak members of the eurozone such as the so-called "Piigs" – Portugal, Ireland, Italy and Spain as well as Greece – all of whom face challenges rebalancing their books. And Greece's woes mean there are fresh fears about whether Portugal and Spain can repay their debts. That's because they all could face higher costs, as investors get nervous about lending money to governments through buying government bonds. Consequently, everybody's interest rates are heading higher as governments have to pay a greater risk premium to borrow money. Source: Channel News Asia, 23 April 2010; BBC News, 16 February 2010 Table 1: Overall Fiscal Balance (Percent of GDP) 2008 2009 2010 2011 (est) Greece -12.2 -15.6 -10.5 -9.2 Ireland -7.3 -14.0 -31.2 -13.1 Italy -2.7 -5.4 -4.5 -3.9 Portugal -3.7 -10.2 -9.8 -4.2 Spain -4.5 -11.2 -9.3 -8.9 Source: IMF Extract 2: 'Austerity' Named Word of the Year 2010 As Greece faced a debt crisis, the government pa ssed a series of strict austerity measures, including taxes hikes and cutting public sector pay. The move sparked angry protests, strikes and riots across the country as unempl oyment skyrocketed and the crisis spread to other European nations. Austerity, defined as "the quality or state of being austere" and "enforced or extreme economy," set off enough searches that Merriam-Webster named it as its Word of the Year for 2010. Source: Russell Contreras, 20 Dec 2010, Huffington Post

3 © DHS 2012 Extract 3: EU Austerity Drive A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits. Greece  curb its widespread early retirement schemes  scrap bonus payments for public sector workers; freeze public sector salaries and pensions for at least three years  raise sales or value-added tax (VAT); raise taxes on fuel, alcohol and tobacco Ireland  cut 24,750 public sector jobs; cut all public servants' pay by at least 5%  cut social welfare spending  raise sales or value-added tax (VAT); introduce carbon tax set at 15 euros per tonne of CO2 Source: BBC News, 7 December 2010 Extract 4: Alternatives to Austerity In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties a bout their growing national debts. In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits. To formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality, it is suggested that:  spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run.  corporate welfare to be eliminated. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world.  with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade Source: Joseph E. Stiglitz, Project Syndicate, 6 Dec 2010

4 © DHS 2012 Extract 5: The European Debt Crisis: Implications for Asia and the Pacific Asia-Pacific economies are increasingly concer ned about the impact of the public debt crisis in a number of European economies. The measures being taken by affected European economies to decrease their public debt levels are likely to constrain GDP growth rates in the coming years. Notwithstanding the above, it is important to recognise that, to date, the crisis has been contained within the small European countries, and that it is only these countries that are having to rein in budget deficits the hardest. Greece, Portugal, Ireland and Spain together account less than 20 percent of euro zone GDP. In contrast, the exports of Asia-Pacific dev eloping countries have continued to be bolstered by robust demand from within the region. Intraregional exports make up the largest share of total exports. Source: UN ESCAP, Macroeconomic Policy and Development Division Policy Brief, No.4, Aug 2010 Questions (a) Compare the fiscal balance of Greece and Spain in 2010. [2] (b) Explain what determines the effectiveness of the tax increases outlined in Extract 3 in raising tax revenues. [2] (c) With reference to Extract 3, using a supply and demand diagram, explain the effect of the austerity drive on the market for alcohol in Greece. [5] (d) With reference to Extracts 3 and 4, discuss whether indirect taxes and subsidies hinder the effective working of the market mechanism. [8] (e) Explain how, according to Extract 4, the austerity measures intended to trim governments’ budget deficit may prove counter-effective while the spending on high- return public investment could reduce the national debt in the long run. [5] (f) Discuss the effects of EU austerity drive on the Asian economies. [8]

5 © DHS 2012 Question 2 The Chinese Economy Extract 6: Currency Questions Dominate China's Economic Agenda Chinese trade surplus which had risen to its second highest level this year will fuel American accusations that the yuan is undervalued by anything up to 40%, effectively subsidising Chinese firms and allowing China to steal US jobs. China recognises the need to appreciate her own currency, but does not want to do so quickly, and is keeping to its long-held position that it will reform its currency policy gradual