YJC_H1_ECONS

2016 H1 Prelims Suggested Answers Case Study 1 (a) With reference to Extract 1, identify and explain one demand factor and one supply factor causing the price of oil to fall considerably in 2014. [6] Explain fall in demand Weak econ activity  demand for less oil as factors of production Growing switch to other fuels Explain the rise in supply Rise in shale oil production by US Saudi did not curb their production Max 3m for demand and supply factors well explained Explain that the rise in supply is greater than the fall in demand [3] Extract mentions that there are lots of spare supply of oil and that the switch to other fuel may not be that significant Explain the fall in price of oil Due to the surplus, there is a fall in the price of oil (b) (i) Describe the trend in the current account balance in Malaysia between 2009 and 2015. [2] Current account is in a surplus [1] but the surplus (as a percentage of GDP) is decreasing [1] (ii) Explain a possible reason for the trend above. [2] Due to the falling oil prices, export revenue of oil will fall. As export revenue is part of the current account balance, this will lead to a worsening of the current account balance. [2] Accept other possible reasons (c) Explain how falling oil prices affect the government budget balance and the value of Malaysian ringgit. [4] Government budget balance worsens [1]. Falling oil prices lowers the government’s oil-related revenue [1]. Malaysian ringgit depreciates [1]. With a fall in the level of exports, the demand for Malaysian ringgit falls. This causes the external value of Malaysian ringgit to fall [1]. (d) According to Extract 2, “analysts generally consider that long -term economic benefits (of the removal of fuel subsidies) are numerous.” Explain one long-term economic benefit that Malaysia can reap with the removal of fuel subsidies. [2] Government can channel the funds to areas of the economy that can drive growth. This will increase the AS in the long run, promoting potential growth in the economy [2].

(e) Analyse the impact of falling oil prices on both the households and firms in Malaysia and in Singapore. [6] Impact on households and producers in Malaysia Higher expenditure on Malaysian households because with the falling oil prices, the government is removing the fuel subsidy. This is made worse on the lower income group because the price of the necessity will go up. This lowers the material SOL of the citzens. As for the producers, they will also feel the impact on rising fuel prices due to the removal of subsidy. This increases their cost of production, causing a fall in profits. For oil exporting firms, they will also suffer a loss in profits because o f the falling oil prices, total revenue falls. Impact on households and producers in Singapore Households will reduce their expenditure due to lower electricity tariff and lower