TJC H1 ECONS CSQ2 Ans

TJC Prelims 2017 CSQ2 Answers (H1) (a) With reference to Table 2, explain why the Greek go vernment should be concerned about its economy. [4] As seen in Table 2, data indicates Greece suffering from negative economic growth (-0.2%), high unemployment rates (2 5%) and high public debt (177% of GDP) in 2015. With reference t o a government’s macroeconomic objectives and the trend from 2011 till 2015, these are causes of concern for the Greek government. Negative economic growth: [2m] Greece has been experiencing negative rates of grow th since 2011, with the exception of 2014. [1] This implies that n ational income has been falling, affecting purchasing power of consume rs. This results in a reduction in willingness and ability of consumers to demand goods and services, adversely affecting material standards of living. OR It would also impact producers who may reduce the level of production as inventories start to accumulate. As such, produc ers may lay off workers as the demand for labour is derived from th e demand for their products. This can be reflected in the high levels of unemployment in Greece. High unemployment rates: [2m] Unemployment rates have fluctuated above 20% since 2012. [1] As citizens are unable to find or hold onto a job, thi s reduces both their material and non-material standard of living. As th e unemployed no longer earn income, there is a sharp fall in their purchasing power, hence, their ability and thus level of consumption. This reduces their material standard of living. OR As unemployment rates are high, the expectation of finding a new job tends to be low, resulting in high levels of stress and negative emotions in those who are actively seeking employme nt – non- material standard of living are adversely affected. OR High unemployment rates may further tax government budget as large amount of resources are spent on unemployment benefits. This further worsens the high public debt in Greece. High public debt: [2m] Greece has been suffering from high public debt of around 170% of their GDP. [1] This is a key constraint on governme nt policy as the Greek government will be restricted in their employ ment of expansionary fiscal policy to boost the economy and push it out of a recessionary slump or to reduce demand-deficient unemployment. OR

It will also restrict government expenditure on pro viding necessary welfare benefits to low-income households and those unemployed. This reduces the government’s ability to improve it s citizens’ standards of living, which should have been a key o bjective of any government. Any 2 points for a full 4 marks. (b) (i) Explain the main causes of Greece’s ballooning public debt. [2] A country’s ballooning public debt may be due to ri sing government expenditure and/or falling tax revenue. In the case of Greece, there is a government budget deficit that is financed by borrowing. As implied in Extract 5, the possible causes of Gre ece’s ballooning public debt may be due to rising government expendi ture due to its pensions system which has “perceived generosity rel ative to other Eurozone states”. [1] Apart from this, there are clear issues brought up by the troika of lenders (European Commission, European Central Bank and the International Monetary Fund) in terms of Greece’s t ax system where Greece provided a “30% discount for the Greek islan ds” and a possible unfair contribution to taxes by the Greek oligarchy. This implies falling tax revenue collected by the Greek government. [1] (ii) With reference to Extract 6, comment on how the mea sures demanded under the Greek bailout agreement might impact the Greek economy. [4] Based on Extract 6, Greece has been called upon by the troika to introduce “quasi-automatic spending cuts” in order to achieve their commitment of a “budget surplus of 1% in 2015, risi ng to 3.5% by 2018”. As such, Greece has been told that it needs to improve the sustainability of pension system, implement tax ref orms as well as to liberalise the economy. In a nutshell, these requir es the Greek government to cut down on spending and to increase it tax revenue. [1] This has a clear contractionary effect on the Greek economy as a reduction in pension payments, will result in a fal l in aggregate demand (AD). This will also reduce the purchasing p ower of pensioners, reducing their consumption levels (C). Tax reforms include a removal of tax exemptions for big tourist islands, broadening of the tax base and the revision of taxes to better target the wealthy Greeks. These will bring about an increase in tax r evenue, but will depress export revenue (X) since tourism levels wil l be affected given higher tax rates. Households and firms will also be affected, both experiencing higher tax rates, reducing disposable income as well as post-tax profits. Households will decrease their le vel of consumption (C) while firms, seeing that investments are less p rofitable, will reduce their level of investment (I). Given a fall in C, I and X, there will be a combined fall in AD. This fall in national income w ill further reduce income-induced consumption, resulting in a multipli ed reduction in AD (reverse multiplier process).

[1m for an explanation of any of the contractionary measure – negative impact.] As such, while the measures demanded under the Gree k bailout may be aimed as achieving a budget surplus, the immedia te impact is a contractionary one on the economy, further worsenin g the current economic growth of -0.2% as seen in Table 2, result ing in a significant cause of concern as demand-deficient unemployment m ay be exacerbated, further lowing standards of living in Greece. [1] This is acknowledge by Prime Minister Alexis Tsipra s as he agreed that the measures are “recessionary”. However, he is hopeful as these measures are the better of two evils, the other being Grexit. [A Grexit situation may result in a collapse of conf idence in the government and the Greek economy, further worsening the current situation. It will also mean a loss in bailout, res ulting in the defaulting of Greece on its debts, which may lead to massive r ecessionary pressures in the Eurozone (contagion effect), adver sely affecting Greece. ] In committing to these measures and liberalising th e labour market, it may aid in improving the confidence level of househ olds and firms in the Greek economy, allowing for “inward investment… to flow”. Such inflow of capital will aid in revitalising the Gree k economy given an increase in I which will increase AD. Stronger conf idence in the economy and obtaining the bailout will also improve expectations of the economy, allowing for greater possible foreign direct investments and domestic investment by firms. [1m for positive impacts of measures] In the short run, measures demanded are recessionar y, but they are in place to reduce the fundamental issue faced by G reece – high public debt. (c) Explain the possible considerations behind China’s attempt to rebalance its economy. [6] Question interpretation: • What is meant by China’s attempt to “rebalance its economy”? • How will this impact China’s economy? • Given these impacts, what were possible considerations by the government – taking into account concerns by other economic agents (households & firms) As seen in Extract 6, China’s attempt to rebalance its economy is a “move towards an economy led by consumption and ser vices, rather than one driven by exports and investment, in view of weak external climate and excess capacity”. In doing so, it is a deliberate shift away from its traditional drivers of growth, resulting i n weaker growth, something that Chinese Premier Li Keqiang has accepted, “as long as enough new jobs were created”. In China’s rapid rise as an emergi