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 on hiring of workers and even retrench workers to cut losses ➔ higher unN ➔ lower demand for workers hence lower wages ➔ further reduce consumption spending, AD falls even more and the reverse multiplier process will continue until no further reduction in C. This means that the national output will fall by a multiplied amount. Requirement 2: Explaining how supply-side factors could have caused a drop in national output Supply-chain disruptions leading to r ising cost of production or/ and low productivity improvement Supply-chain disruptions in terms of labour markets as well as raw materials ➔ higher unit COP ➔ lower SRAS Pass on higher costs to consumers in terms of higher GPL Cuts back production as they have difficulties securing labour and essential FOPs like food, commodities and even oil. Conclusion • Falling national output can be caused by a drop in both AD and AS, often time, these factors are inter-related. • Falling national output have severe imp lications on other macro objectives such as unemployment and balance of trade position, hence it is important that governments put in place policies to reduce the fall. Level Knowledge, Application, Understanding and Analysis Marks L3 • Well-developed analysis on both the demand and supply factors that caused a fall in national output including: - Good use and explanation of AD/AS as conceptual framework - No major inaccuracies - Content is relevant 8-10

- Start and end point is clearly explained, no missing elaboration. L2 • Developed but one-sided explanation on either the demand or supply factors that caused a fall in national output. Or • Under-developed analysis on both the demand and supply factors: - Conceptual framework of AD/AS is used but there are several inaccuracies - start and end point not entirely clear, some incoherence in the answers 5-7 L1 • Descriptive answer without any conceptual framework • Answer contains many inaccuracies. 1-4 (b) Discuss whether transfer payments are the most appropriate policy tool to overcome negative economic growth for all economies. [15] Command word Discuss whether – use economic reasoning to provide balanced argument on the appropriateness of the use of transfer payments to increase RNY across all economies Start point: transfer payments End point: raise national output Concepts AD-AS Context Open context – all economies To consider the differing characteristics of the economies Introduction: Define what is transfer payments. Cash vouchers, subsidies that are not linked to economic transactions, but part of government’s planned expenditure (part of the government budget) When economic output is falling ➔ country is in recession, loss of jobs and a possible fall in national and household income ➔ worsens standard of living, hence the government needs to implement policies to help overcome this. Requirement 1: Transfer payments can be appropriate for some economies to increase real national output Transfer payments can also include subsidies to firms to offset the rising unit cost of production (e.g. Wage Supplement Schemes) ➔ lowering unit COP ➔ increase SRAS from SRAS1 to SRAS2 and hence, increase RNY since firms are able to produce more with a lower unit COP.

Transfer payments can also include grants on innovation (e.g. to offset firms’ innovation/ R&D costs) ➔ greater ability to earn more profits since costs is lower ➔ higher ability to invest ➔ I increases Transfer payments: subsidies to households (e.g. GST vouchers , Rediscovery Vouchers, CDC vouchers) ➔ greater ability to consume as the out-of-pocket expenses is lower ➔ higher C (multiplier process )Both the increase in C and I can lead to an increase in AD , from AD1 to AD2 ➔ firms react by producing more ➔ increase in real national income ➔ as they require more FOPs to increase production, they pay more for the FOPs ➔ leading to higher income earned by FOPs ➔ stimulate further induced consumption ➔ AD increase further and hence, RNY increase further. This multiplie r process will lead to a multiplied increase in RNY from the increase in transfer payments by government. (Part of Evaluation) This policy tool will be appropriate for: 1) Countries with larger multiplier size ➔ RNY increase by a bigger amount ➔ faster to get out of recession and government does not need to spend as much to raise RNY sufficiently. Countries with small multiplier size will need to spend more on transfer payments in order to raise the RNY to the same extent. 2) Countries whose government budget in a healthy surplus ➔ transfer payments require government budget ➔ without the budget, governments may have to borrow to finance the transfer payments ➔ leading to accumulation of public debt, which means that any economic growth benefits are likely reduced as part of it has to go towards repaying the debt. (Accepted response inclu