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 pump prices. As for the firms, it depends on which types of firms they are . For firms which requires oil as a factor of production, they see a fall in their cost of production, thus raising their profits. But for firms that rely on demand from oil business, they see a fall in their revenue, thus losing profits. 2m for each well-explained impact on each group of people (f) In light of falling oil prices, discuss whether the shift in Singapore’s growth strategy will help Singapore to achieve a sustained economic growth into the future. [8] Explain what is meant by sustained economic growth Increase AD together with the rise in LRAS Explain why the need for Singapore to shift With falling oil prices, Singapore cannot always depend on oil refinery for growth. As seen from Extract 2, industries that rely on demand from the oil business are making losses and retrenching workers. As such, there is a need to shift so as to develop a CA in other areas that will help Singapore achieve economic growth. Explain why the shift may be able to help Singapore achieve economic growth Evidence from Extract to explain how AD and AS can be increased in the long run, promoting potential economic growth  Need for Singapore to shift from value-addedness to value creation  Singapore has identified 5 new areas to develop in future  Trying to deepen skills and innovation and promote the SMEs  Encouraging SMEs to come up with new products which we can have a comparative advantage in  increase our level of exports in future  increase AD Explain why the shift may not be sufficient to help Singapore achieve a sustained economic growth  Singapore is experiencing an ageing population  MNCs may not want to invest in Singapore. Even as we are trying to promote SMEs in our country, MNCs are still very important now to help promote growth in our country. With

globalisation, there is free movement of labour and capital, MNCs are able to shift to other countries. As such, it is important for Singapore government to also find ways to attract these MNCs into our country.  Policies to increase AD are also important to aid our actual economic growth. Without a rise in AD, a rise in LRAS is not sufficient to sustain economic growth into the future  With such a shift to deepen skills, some of the workers who do not have the relevant skills may face structural unemployment  wastage of resources  It is assuming that the government has identified the right areas of developments. As the world is now very dynamic, the government must ensure that the areas which are identified for development are able to stay competitive in the world Conclusion (overall judgement) Good that the Singapore government is able to shift to other new areas because in the age of globalisation, Singapore cannot remain stagnant and continue to rely on export -led growth . Other countries may gain comparative advantage in oil refinery, for example, and this will bring about adverse effects to our economy.

Case Study 2 (a) (i) Compare the government budget balance of Germany with that of Greece between 2011 and 2015. [2]  Greece’s government budget balance was in deficit throughout whereas for Germany, its budget balance was initially in deficit but from 2014 onwards was in surplus. (1m)  Both countries experienced an improvement in its fiscal position over the period. (1m) (ii) State the likely impact of the change in government budget balance on the overall debt level in Greece. [1]  The overall debt level in Greece is likely to increase. (1m) (b) (i) With ‘lowered interest rates’ in Germany, identify one possible injection that would change and state the change that would occur. [2]  Investments (1m)  Increase (1m) (ii) Using economic analysis, explain how Germany brought down its overall debt. [3]  The rise in investments will lead to an increase in AD, and real national incomes will increase by multiples.  As household incomes and firms’ profit levels increase, so will income tax and corporate tax, thereby increasing the government’s collection of tax revenue.  In addition, the rise in incomes will also lead to a rise in induced consumption, thereby increasing the amount of GST collected by the government. (c) With reference to the data , comment whether living standards in Greece is higher than that in Germany. [6]  Greece’s SOL can be perceived to be higher o Citizens receive extensive amounts of pension payments by the government (E6P1), which means even when people stop working, they still enjoy significant purchasing power. Material SOL is high. o Retirement age is relatively early at 61 (E6P2), thereb y giving citizens much leisure hours upon retirement. Non-material SOL is high.  Germany’s SOL can be perceived to be higher o Germany’s work hour per week is relatively short at 35.6 (E6P2), which means working p