MJC H2 ECONS CSQ2 Q A

2018 JC2 H2 Economics Prelim_CSQ2_Suggested answers (a) With reference to Table 4, compare the changes in GDP between Germany and the UK from 2015 to 2017. [2] Similarity: GDP of both Germany and the UK increased from 2015 to 2017. Difference: However, Germany’s GDP was increasing at an increasing rate, while the UK’s GDP was increasing at a decreasing rate. (b) (i) Using a diagram, explain why the pound sterling fell in value after UK had voted to break out of the European Union. [2] As mentioned in Extract 4, breaking out of the European Union was a “lurch into the unknown”, which could give rise to loss in investors’ confidence in the economy. Explain impact on SS of pound sterling in forex market: This would cause capital outflow from the UK, leading to an increase in supply of pounds in the foreign exchange market, hence reducing the external value of the pound sterling. OR Explain impact on DD for pound sterling in forex market: This would cause a fall in capital inflow into the UK, leading to a decrease in demand for pounds in the foreign exchange market, hence reducing the external value of the pound sterling. (b) (ii) Explain whether the depr eciated pound sterling would lead to a higher cost of living and standard of living in the UK. [6] Depreciated pound sterling  fall in price of exports in F.C but increase in price of imports in D.C Impact on cost of living If consumers consume a large quantity of imports, the increased price of final imported goods and services will mean that cost of living will increase. OR If UK firms import significant amount of raw materials from overseas, this will cause imported inflation and hence, increase their unit cost of producing domestic final

2018 JC2 H2 Economics Prelim_CSQ2_Suggested answers goods, hence, causing SRAS to fall, leading to increases in GPL. Hence, cost of living increases. Impact on material SOL Assuming marshall-lerner condition hold s (PEDx + PEDm>1), net exports will increase as seen from “boosted exports orders for manufacturing”(Ext 6)  assuming there is spare capacity in the economy  increase AD will result in increase in real output  national income increases by a multiplied amount  increase in quantity of goods and services consumed  increase material standard of living Explain “whether”: Comment on the extent of change Material SOL may have worsened instead if the rise in general price level is faster than the increase in national income. (c) Explain a likely advantage to th e foreign firms for locating their businesses in Ireland. [2] Cost advantages Locating businesses in Ireland will enable fo reign firms to tap into the large EU market and sell to a larger market as inferred from “jumping off point for their European ambitions” (Ext 5). Such increase in market size in turn enable it to produce larger quantity, reaping economies of scale, hence enjoying lower average cost and higher profit, ceteris paribus. Or Access to good “technological infrastructu re” and “leading services” (ext 5) can enable foreign firms to gain greater productivity if these translate to greater output produced per hour with lesser disruptions to internet connection etc, hence enjoying lower average cost and higher profit, ceteris paribus. Revenue advantages Being able to sell to a larger market m eans that foreign fi rms will be able to gain larger increases in demand for their goods and services, resulting in increases in total revenue and hence profits, ceteris paribus. (d) In light of the issues faced by the UK, as mentioned in Extract 3, evaluate the Bank of England’s decision to cut interest rate. [8] Issues faced by UK: Extract 3: “Inflation is surging, consumer spending is slowing, productivity remains mired in pre-crisis growth levels, and uncertainty reigns supreme” Explain how decrease in interest rate works Decreases in interest rate  decrease cost of borrowing more firms will be willing to invest  Investment level increases The fall in the cost of borrowing would al so result in an increase in consumption expenditure on big ticket it ems as consumers would have the ability to purchase items on credit.

2018 JC2 H2 Economics Prelim_CSQ2_Suggested answers Decrease i/r: Ability to address the various issues faced by UK (Students should address at least 2 problems mentioned below.) 1. “Slowing consumer spending” The lowered cost of borrowing will therefore help to address the ‘slowing consumer spending’ and hence help to contribute to economic growth. The increase in both consum ption and investment expenditu re would result in an increase in UK’s aggregate demand as AD= Cd + I + G + X  shortage created  firms run down inventories  upward pressure on GPL  incentive for firms to ↑output to meet demand real output in economy has in creased, leading to actual growth. 2. “Inflation is surging” The decrease in interest rate may cause hot money outflows, hence, causing pound to depreciate further. This would worsen in flation rates as explained in part bii. However, this maybe a temporary impact as pound may strengthen after the situation on Brexit has stabilised. 3. “Uncertainty reigns supreme” However, given that ‘uncertainty reigns’ the extent of increase in Cd and I will be smaller as consumers are more likely to withhold consumption given uncertainty in their employment and firms are also likely to withhold investment levels given the uncertainty in UK’s economic outlook after Brexit  policy will be ineffective in raising economic growth, if this is the intent of the UK govt. 4. “Productivity remains mi red in pre-crisis levels” Also, whether the decrease in interest rate s will help to increase productivity in UK depends on the type of investment that th e firms will undertake given the cheaper cost of borrowing. Given that it is rather incidental; the effectiveness of the policy is likely to be very low. Conclusion [evaluate UK’s decision] UK’s decision to cut interest rate is ineffective given that it is less likely to address any of the above problems. With uncertainty as the biggest problem, therefore, increases in AD is likely to be low. More importantly, weak productivity is likel y to be a main concern and area for the UK govt to focus on as UK leaves the EU. It needs to increase its competitiveness in order to prevent greater lo ss of FDIs out of UK as a re sult of foreign firms that used to locate in UK to have access to the larger EU market. [suggest alternative policies] This can also help to reduce the uncertainty on UK’s future economic outlook. Therefore, th e UK govt should start looking at implementing ss-side policies instead. Level Knowledge, Application, Understanding and Analysis Marks L2 For a well-explained answer on decreasing interest rate to address at least 2 macroeconomic problems faced by UK. 4-6

2018 JC2 H2 Economics Prelim_CSQ2_Suggested answers L1 For a limited explanation (lacking in economic linkages and analysis) on decreasing inte rest rate to address the macroeconomic problems faced by UK. 1-3 Evaluation E1 For an evaluation based on economic analysis and case materials arriving at a judgement on UK’s decision to cut interest rate. 1-2 (e) With reference to the data where appropriate, assess whether on balance, the benefits of Brexit outweigh the costs for UK and the remaining EU member countries. [10] Introduction: The decision to leave the EU will give rise to both benefits and co sts to the UK as well as the remaining EU member c ountries. However, whether the benefits outweigh the costs for the UK and the remaining EU member countries depends on a few factors. (Note: Students should at least discu ss 1 cost and 1 benefit for UK and EU respectively.) Development 1: Explain the impacts of Brexit on UK Be