2022 JC2 H2 Prelim Essay Q5 (Suggested Answers).docx

5 Globalinflationhasbeenrevisedupwardsdueto risingfoodandenergyprices. (a) Explaintheconflictsbetweenthegovernmentmacroeconomicgoals.[10] (b) Discusstheotherfactorsthatcaninfluencegovernmentchoiceofpoliciesto tackle the rising prices.[15] Suggested answer for part (a) Introduction: ● Government aims to achieve the following 4macroeconomic goals: Highandsustainableeconomicgrowth, low inflation (price stability), low unemployment and healthy balance of payments.● Possible conflicts may arise in achieving the 4 macroeconomic aims . Body: 1. Low inflation vs actual growth/low unemploymentConflict arises when the economy aims to achieve low inflation and actual growth/unemployment. Forexample, as Vietnamexperiencegrowthfrom6.2%to7.0%growthandfall inunemploymentfrom2.33%to2.21%from2016to2018, her inflationrateincreases from2.6%to3.5%forthesameperiod. Thisisbecauseas ADincreaseclosetofull employmentfromAD1toAD2toAD3asseeninFig1,thiswill leadthereal national incomeincreasesfromY1toY2toY3,henceachievingactual growthintheshortrun. Inaddition, the increase inADwill alsoresult inanincreaseproductionlevel as firms will needtostepupproductiontomeet thehigher demand. This result inahigherneedforfactorofproductionandincreasein the hiring of factor of production like labour, thus reducing the cyclical unemployment. However, thetradeoff toeconomicgrowthandlowunemploymentisthatgeneral pricelevel increasesasAD increases close to full employment level, causing demand pull inflation. As AD increases, theeconomy moves closer to the full employment, thus resulting in higher competition for the depletingavailableresources. This pushes thepriceofresourcesupandresultsinfirmsexperiencingarisingcostof production. Thefirms will thentransfer therisingcost of productiontotheconsumer thereforepriceschargedfor their commodities will rise. GPLwill thereforeincreaseas real output increases. Hence,thisexplains for the conflict in achieving low inflation and actual growth/low unemployment. 2. Low inflation vs healthy balance of trade

When export revenue is increasing due to the increase in export demandand/or import expenditureisdecreasing due to fall in import demand, this will result in an increaseinnet export andimprovingthebalanceof trade. However,theincreaseinnetexportwill leadtotheincreaseinAD. AsADincreasesasseeninfigure1,theeconomymovesclosertothefull employment,thusresultinginhighercompetitionforthedepletingavailableresources. Thispushesthepriceofresourcesupandresultsinfirmsexperiencinga rising cost of production. The firms will then transfer the rising cost of production to the consumertherefore prices charged for their commodities will rise and GPL increase. 3. Economic growth vs low structural unemploymentEconomic growth involves changes in production bothinterms of thegoods produced, andtechniquesusedandtheskillsrequired.Hencethemorerapidtherateofgrowth,themorerapidtherateofchangeinproduction techniques. People may then find their skills are no longer relevant or their