H2 Prelims Paper 2 Q5_Suggested Answers

Suggested Response for Essay Question 5 (a) Explain one possible demand-side cause and one possible supply-side cause of falling national output for a country. [10] Command word Explain – use economic reasoning Start point: AD-AS causes End point: falling national output Concepts AD-AS Context Open context Introduction: Framing – unpacking slowdown in economic growth rate as well as the challenges facing Singapore ▪ National output is measured using real Gross Domestic Product. It is the monetary value of goods and services produced in a country, in a given period of time. ▪ Falling national output suggests negative economic growth rate ▪ It can be due to changes in the aggregate demand which measures the total demand of all goods and services by economic agents within a country at each price level, as well as aggregate supply which shows the total output of goods and services (national output) that all firms in a country could produce at each general price level , given the current level of resources and technology. Requirement 1: Explaining how demand-side factors could have caused a drop in national output. Changes in domestic government policies (e.g. tax rates or interest rates hikes) Government may implement contractionary monetary policies such as raising interest rates. Higher i/r leads to higher cost of borrowing and greater returns to savings. This means that households may be more inclined to save, rather than spend, leading to a fall in consumption expenditure (C) ➔ lower AD 5. When faced with negative economic growth, governments often turn to fiscal stimulus to support their economy. Some governments provide transfer payments such as cash vouchers, while others spend on building infrastructures. (a) Explain one possible demand -side cause and one possible supply -side cause of falling national output for a country. [10] (b) Discuss whether transfer payments are the most appropriate policy tool to overcome negative economic growth for all economies. [15]

At the same time, a higher interest rates could lead to previously profitable investments to be less profitable now since a greater proportion of revenue needs to be paid as higher i/r. This may cause firms to invest less ➔ lower investment expenditure (I) ➔ lower AD. Weak global demand / foreign countries’ govt policies Globally, countries are still grappling with the COVID-19 virus and are slow to recover in terms of tourism and production. Countries like the United States of America (USA) are also suffering from a higher unN rate due to massive job losses ➔ poorer income growth Weaker income growth in foreigners ➔ less likely for foreigners to spend on imports (assume M is positive XED) ➔ this would affect a country (trading partner)’s export revenue significantly (X) ➔ fall in AD. The fall in AD will see firms cutting back on production in reaction to the falling revenue earned. As such, they cut back