NYJC H1 ECONS

J2 H1 Economics (8819/01) 1 PAPER 1 Tuesday 12 September 2017 08:00 – 11:00 TIME : 3 hours INSTRUCTIONS TO CANDIDATES Do not open this paper until you are told to do so. Write your name, class and name of economics tutor in the space provided on the writing paper. Do not use staples, paper clips, glue or correction fluid/tape. Section A Answer all questions. Section B Answer one question. The number of marks is given in the brackets [ ] at the end of each question or part question. Write your answers on the writing papers provided. If you use more than one sheet of paper, fasten the sheets together. You are advised to spend several minutes per question reading through the data and questions before you begin writing your answers. There are _8_ printed pages including this cover page PRELIMINARY EXAM 2017 Economics JC2 H1 (8819/01) NYJC

J2 H1 Economics (8819/01) 2 SECTION A Answer al l questions. Question 1 Trade Slump and Deflation Extract 1: UK slips into deflation as prices fall 0.1% The UK has officially slipped into deflation for th e first time in more than half a century, but economists and policy makers are not concerned, say ing that a brief period of gently falling prices is more likely to help growth than harm it. The UK has been teetering on the brink of deflation for several months because of the slide in global oil prices, falling household incomes and th e strength of sterling, which has reduced UK’s export competitiveness. Suneil Mahindru, chief investment officer internati onal equity at Goldman Sachs Asset Management, reacted by saying: “We are not concerne d about the UK”. Falling prices are “freeing disposable income and many industries, suc h as retail, are benefiting”, he added. UK households have suffered from falling real wages ov er the past few years. Now that prices of consumer essentials like food and energy are stagna nt or falling, many households are finally getting a boost in living standards. Chancellor George Osborne said the data were good n ews for family budgets and should not be mistaken for “damaging deflation” — a vicious cy cle of falling prices and wages which shrinks an economy. He added that once deflation se ts in consumers would expect prices to fall and they would delay spending for as long as p ossible in order to save money. This would perpetuate the problem and is known as a deflation trap. The deflation trap would lead to falling economic growth. Source: Adopted from The Financial Times, 19 May 2015 Extract 2: Deflation risk and trade slump cast chill over global economy The world economy is at risk of slipping into a def lation trap and faces a historic slump in global trade that should serve as a wake-up call fo r governments around the world. The International Monetary Fund warned on Tuesday that a “broad-based phenomenon” of low inflation, fed by a collapse in commodity prices an d faltering demand, risked deteriorating into a full-blown deflation trap, particularly in advanced economies. The fund’s warning, came as the World Trade Organis ation forecast global trade volumes would rise only 1.7 per cent this year. This would be the slowest increase since the 2008 financial crisis, and a big reduction from the 2.8 per cent growth it forecast in April. "The dramatic slowing of trade growth is serious and sho uld serve as a wake-up call,” said Roberto Azevêdo, the WTO’s director-general. The trend was particularly worrying in the context of an increase in protectionism and anti- globalisation rhetoric seen in the US and around th e world, he said, adding: “This is a moment to heed the lessons of history and recommit to open ness in trade, which can help to spur economic growth.” The twin warnings highlight mounting concerns over the world economy’s slow recovery from the 2008 crisis and the tepid response by policymak ers. They also point to two key areas of

J2 H1 Economics (8819/01) 3 concern. International institutions are increasingl y worried about the potential impact on a fragile global economy of the rise of populist poli ticians, such as US presidential candidate Donald Trump, and the protectionist policies they put forward. They are equally frustrated by what they see as the failure of many governments to take tough decisions and their continuing overreliance on central banks and monetary policy to respond to slow growth. The IMF has for years urged governmen ts to adopt more growth-friendly fiscal policies and to push structural reforms to stimulate consumption and investment. Alongside the warning of a deflation trap, the IMF called for governments to target stagnant wages and adopt policies such as raising the minimum wage to boost incomes. Such a response, IMF economists wrote, was particularly necessary in adv anced economies, where “the scope of monetary policy to further stimulate demand is perc eived to be increasingly constrained” and “policy rates are not far from their effective lower bounds”. Source: Adopted from The Financial Times, 28 September 2015 Extract 3: MAS 'must remain alert' to signs of slow growth Singapore's central bank should "remain vigilant" t o signs of slow growth in the country and make policy adjustments if needed, the International Monetary Fund (IMF) said. In a statement released yesterday, after a visit here, fund repres entatives noted that Singapore's growth prospects remain subdued, given a lacklustre global outlook. The IMF also said the Monetary Authority of Singapo re's (MAS) latest move to stop the local currency from rising further against a basket of key currencies was "appropriate", given slowing growth, a weakening labour market as well as low oi l prices worldwide. The fund noted that Singapore's economic growth has slowed markedly in recent years owing to both domestic and external factors. At home, growth is constrained by an ageing labour force, tighter limits on foreign workers and the transition costs of the shift to an innovation- based growth model. On the external front, the outlook for global growth and trade remains subdued , the IMF said. The fund also said Singapore's growth is likely to slow further this y ear, as the full impact of the slowdown in global trade and capital outflows is felt and compa nies continue to hold back on hiring and investment. The most important short-term external risk is a sharper-than- expected global slowdown, which could result from weak growth in Ch ina, other emerging economies as well as key advanced economies. Still, the Singapore Government has enough in its c offers to ramp up spending and provide a short-term lift if the economic outlook worsens fur ther, said the IMF. "The authorities are prepared to implement fiscal stimulus through targe ted measures, for example providing more income transfers to poor families and seniors and a ccelerating infrastructure spending," added the fund in its statement. In the longer run, raising productivity will be ess ential to Singapore's growth, given slower labour force expansion, the IMF said. Source: The Straits Times on 11 May 2016

J2 H1 Economics (8819/01) 4 Figure 1: Inflation Rate in Singapore Source: SingStats Questions (a) Describe the trend in the consumer prices in S ingapore between July 2016 and April 2017. [2] (b) Using extract 1, comment on whether economies should fear deflation. [4] (c) Using aggregate demand and supply analysis, ex plain the causes of deflation in the UK in 2015 as identified in extract 1. [6] (d) In extract 2, the IMF claimed that “the scope of monetary policy to further stimulate demand is perceived to be increasingly constrained” Explain a possible factor that would determine the e