HCI_H2_ECONSs_CSQ2_Answers

2018 HCI C2H2 Economics Prelim Paper 1 CSQ2 Answer Scheme 1 (a) Using the information in Table 1 and Extract 5, (i) calculate and interpret the likely value of income elasticity of demand for Chinese outbound tourism in 2016. [2] Calculation ● Income elasticity of demand = % change in Qd / % change in Y = 6 / 6.7 = 0.90 [1] Interpretation ● Chinese outbound tourism is considered a necessity as it positive income inelastic.[1] (ii) explain how the rise in Chinese outbound tourism might contribute to the value of the Renminbi against the USD from 2013 to 2016. [2] ● Renminbi (RMB) depreciated against the USD as seen in Table 1 [1]. ● Rising outbound tourism means that Chinese tourists will exchange more RMB for foreign currencies like the USD to spend on their trips, thus raising the supply of the RMB in the FOREX market [1] (Although tourism expenditure is conceptually considered as spending on the service imports, there is no need for this to be explicitly mentioned for full credit to be awarded.) (b) Explain how an increasing preference for outbound tourism might change China’s multiplier value. [2] ● With rising preference for outbound tourism, Chinese households will spend a greater proportion of every additional RMB earned on foreign goods and services, which are withdrawals from the circular flow [1] ● This will raise China’s marginal propensity to withdraw (MPW), hence lowering its multiplier value since k = 1 / MPW [1]. (Answers which explain why MPM may rise or why MPC may fall are also acceptable. However, to get full credit, these terms must be explicitly mentioned. Answers which show a clear understanding of the multiplier process can still be awarded full credit even if there is no mention of any form of multiplier formula) (c) (i) Use an aggregate demand and aggregate supply diagram to explain why investments and government infrastructure projects have led to excess capacity in China described in Extract 7. [3] ● Rising investments and government spending on infrastructure raises AD through its I and G components and also AS through greater capital accumulation [1] ● However, excessive and indiscriminate investments could have caused AS to rise faster than in AD thus causing excess capacity to arise (or causing the extent of excess capacity to increase) [1] ● Diagram showing AS shifting right more than AD resulting in a larger gap between actual and the full employment output levels [1] (Diagrams which do not explicitly show the change in the gap between actual and full employment output levels will not be credited)

2018 HCI C2H2 Economics Prelim Paper 1 CSQ2 Answer Scheme 2 (ii) Explain why the change in the fiscal balance in Table 1 suggests China’s government spending on infrastructure projects might not be optimal. [3] ● Table 1 showed the possibility of a rising fiscal deficit or decreasing fiscal surplus