AJC H2 ECONS P2

ECONOMICS 9732/02 Paper 2 02 September 2014 Additional Materials: Answer Paper 2 hours 15 minutes READ THESE INSTRUCTIONS FIRST Write your name, PDG and index number in the spaces provided 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. Answer three questions in total, of which one must be from Section A, one from Section B and one from either Section A or Section B. Begin your answer to each question on a fresh sheet of writing paper. At the end of the examination, fasten your answers to each question separately. Fasten this cover page in front of the first question attempted. Indicate in the table below the question numbers of the three questions you have attempted. The number of marks is given in brackets [ ] at the end of each question or part question. Question Number Marks Awarded Name: ________________________________ ( ) /25 /25 PDG: ____/13 /25 Total Marks /75 This document consists of 2 printed pages, including this cover page. [Turn over] ANDERSON JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATION 2014 Higher 2

2 Answer three questions in total. Section A One or two of your three chosen questions must be from this section. 1. From McDonald's burgers in the United States to sugar in Bolivia and chillies in Indonesia, food prices across the globe are soar ing. A 'perfect storm' of bad weather, rapid growth in emerging economies and low interest rates has sent prices for a broad range of farm and non -farm commodities climbing, often at double-digit rates. Source: The Straits Times, February 7, 2011 (a) Account for the sharp rise in the price of food. [10] (b) Discuss whether an increase in the price of food always benefits the producers at the expense of consumers. [15] 2. Economic policies often result in inequity and inefficient allocation of resources. Discuss the view that government intervention results in inefficiency and inequity. [25] 3. Explain what is meant by productive efficiency, allocative efficiency and dynamic efficiency and discuss the extent to which the openness of an economy makes a firm more efficient. [25] Section B One or two of your three chosen questions must be from this section. 4. An already sluggish global recovery shows signs of further weakness, mainly because of continuing financial problems in Europe and slower-than-expected growth in emerging economies. Source: International Monetary Fund, Survey Magazine, July 16, 2012 Discuss the relative importance of the size of the multiplier, the interest elasticity of demand for investment and the crowding -out effect, in influencing governments’ macroeconomic policy decisions to promote investment. [25] 5. “Social spending has consistently taken the biggest portion of the government’s budget, almost doubling between 2006 and 2012. The biggest share in this sector has always gone to education, followed by national development.” Source: The Straits Times, February 22, 2013 (a) Using the concept of circular flow of income, explain how an increase in government expenditure can lead to a multiple increase in national income. [10] (b) Discuss whether the Singapore government should change its current economic policies to achieve a higher standard of living. [15] 6. (a) Explain the possible links between exchange rate and interest rate. [8] (b) Discuss the view that external stabili ty should be a country’s main macroeconomic goal. [17] End of Paper

3 Suggested answer for question 1(a)  Rapid growth in emerging economies  increase in income and hence purchasing power in the burgeoning middle class in these countries  tend to consume more luxury food items such a s seafood and high -valued food  increase demand for food  upward pressure on price  Low interest rates  lower opportunity cost to consume and lower incentives to save since rate of returns is lower  consumption increase  higher demand for food  upward pressure on price  Food = normal good  likely to be income elastic  rise in income will lead to a more than proportionate increase in demand for such food items from D1 to D2 and price increases sharply from P1 to P2  Agricultural food items require time to grow  supply of food is price inelastic in the SR since producers are not able to increase production immediately in respond to a price increase  rise in demand from D 1 to D 2 will lead to a very significant increase in price in the short run from P1 to P2  Bad weather (e.g., drought) reduce agricultural produce  supply of food crops fall from S1 to S2  upward pressure on price  Demand for food is price inelasti c as food is a necessity for survival and it als o takes up a relatively small proportion of consumers’ income now as income has increased  sharp increase in price from P1 to P2 Price Quantity of food D1 D2 P1 P2 Se Si Price Quantity of food De Di P1 P2 S1 S0

4  Overall, the decrease in supply is likely to be greater than the increase in demand o Massive destruction to the crop s not only reduces the supply of food but also adversely affects the productivity of existing land available for cultivation o Rising demand for food is only seen in the emerging economies and unlikely to lead to a large increase in demand for food in general Marking scheme Knowledge, Application, Understanding and Analysis L3 A thorough and clear, detailed explanation on how elasticity and extent of shift leads to the sharp increase in prices with reference to clear diagrams 7-10 L2 An answer that gives a descriptive understanding of demand and supply factors affecting price and elasticity concepts to explain sharp increase but lacking in depth and incomplete explanation 5-6 L1 For an answer that shows descriptive knowledge of demand and supply factors affecting price OR wrong use of economic framework i.e. AD/AS 1-4 Suggested answer for question 1(b)  Since the definition of “food” can span anywhere from major agricultural food crops to final processed food products, must refer to o Producers and consumers of agricultural food crops, as well as o Other producers and consumers down the supply chain such as food manufacturers and restaurants The increase in the price of food can benefit the producers at the expense of consumers when we are analysing the m arket for agricultural food crops as a whole  Considering producers to be farmers in the food -exporting countries like Thailand and the consumers to be from food-importing countries like Singapore  Rise in price of food is due to a fall in supply as explaine d in part (a)  demand for food in general is highly price inelastic due to the lack of substitutes for food  will lead to a less than proportionate fall in quantity demanded and a rise in import expenditure from P 0E0Q00 to P1E1Q10 in Figure 1 by the cons umers in the food-importing countries  farmers in food -exporting countries will enjoy higher revenue of the same amount as well

5 Figure 1: Market for food in general  However, also have to consider the total cost to the producers in ord er to determine their profits if total cost of production increases more than the total revenue, the profits of the producer will go down  producers can also b