NYJC H2 ECONS P2 (Macro Suggested Answers)

2018 JC2 H2 Economics Prelim Paper 2 Suggested Answer 4 (a) Explain the key determinants of sustained economic growth. [10] (b) Assess the extent to which the si ze and openness of an economy affects the choice of macroeconomic policies a government adopts to achieve sustained growth. [15] Suggested answer for part (a): Question Analysis Command Explain Content Key determinants, sustained econom ic growth (actual & potential growth) Context No specific context Synopsis: Students are expected to explain the determinants of both actual and potential growth in order to achieve sustained economic growth. Answer should cover a broad scope and include both internal and external factors as well as recognise that what constitutes the “key” determinants would vary with different economies. Analysis should be supported by ADAS framework with use of real-world examples. Introduction • Economic growth is defined as the increase in real GDP or an expansion in the productive capacity of an economy. It is one of the macroeconomic goals of a government. • For economic growth to be sustained in the long-run, actual growth should keep pace with potential growth, thereby leading to non-inflationary growth. • The “key” determinants of sustained economic growth vary with different economies. Body (A) Key determinants of actual growth • Actual growth is the percentage annual increase in national output. It results from the higher and better utilisation of resources whic h can be achieved through an increase in AD when the economy is operating below the full employment level and/or a rise in SRAS. • Explain the determinants of actual growth: AD due to C, I, G, (X-M) o Increased consumption expenditure due to growing population and rising disposable income  middle class expansion especially in emerging economies like China (76% of China’s urban population will be considered middle class by 2022 compared with 4% in 2000)  rising affluence leads to increased purchasing power  consumption-led growth as evident in the fact that cons umption expenditure ac counted for 58.8% of China’s GDP growth in 2017  C leading to AD. o Increased investment expenditure due to posi tive economic outlook or inflow of FDI attracted by sound economic fundamentals, good network and infrastructure, strong legal framework and attractive tax system (e.g. Singapore)  I leading to AD. o Increase in net exports due to growing global economy and rising pace of globalisation, especially in small and open economies lik e Singapore which has one of the highest trade to GDP ratio in the world in excess of 300%  (X-M) leading to AD

2018 JC2 H2 Economics Prelim Paper 2 Suggested Answer o An increase in C, I and (X-M) leads to an increase in AD from AD0 to AD1 as seen in Figure 1. o Assuming that the economy is operating in the intermediate range, an increase in AD will lead to a multiplied increase in RNY from Y 0 to Y1  actual growth. o Often, developing economies with significant spare capacity will experience the largest increase in RNY while an overheating economy operating at full employment will not see a rise in RNY and will face only inflationary pressures. Figure 1: Actual growth (AD) • Explain the possible determinants of actual growth: SRAS due to COP o Reduction in business costs due to improved productivity, government subsidies etc.  COP  SRAS. o A fall in cost of production will lead to a rise in SRAS, causing a downward shift of the SRAS curve from AS0 to AS1 as seen in Figure 2. o This causes an increase in RNY from Y0 to Y1  actual growth. Figure 2: Actual growth (SRAS) (B) Key determinants of potential growth • Potential growth is the rate at which the ec onomy could grow if it were to use all its resources and can be achieved through the increase in productive capacity of the economy (i.e. LRAS). • Explain possible determinants of potential gr owth focusing on the increase in quantity and quality of factors of production and technological advancement: o Increase in quantity of labour: The size of the labour force affects the level of output of a country and is dependent on two factors – population size and labour force participation rate. To increase the quantity of labour, the government may embark on loose immigration policy or implement pr o-family work policies (e.g. Singapore government encouraging employers to intr oduce more flexible working hours or work-from-home arrangements so more wo men are willing to enter the workforce) or promote population growth through schemes such as the Baby Bonus. o Increase in quality of labour: Policies to improve skills and productivity of the workforce (e.g. Skills Future, Adapt and Grow Initiative, TechSkills Accelerator etc.) o Increase in quantity and quality of capital: Attract FDI, encourage R&D and innovation through funding and tax incentives etc.

2018 JC2 H2 Economics Prelim Paper 2 Suggested Answer o An increase in the quantity and/or quality of factors of production will lead to an increase in productive capacity causing a rise in LRAS from AS0 to AS1. o This causes an increase in the full employment capacity of the economy from Y F to Y FF  potential growth. o While an increase in LRAS leads to potential growth, it COULD also lead to actual growth from Y0 to Y 1 if the economy is operating close to full employment. Figure 3: Potential growth (LRAS) Conclusion • For economic growth to be sustained in the long-run, the actual growth should be kept in pace with the potential growth of the economy. • If the actual growth exceeds potential gr owth, there will be increased inflationary pressure causing prices to rise. If actual growth is slower than potential growth, there will be increased spare capacity, resulting in higher unemployment. Mark Scheme: Knowledge, Application, Understanding and Analysis L3 • Recognising that what constitutes the “key” determinants would vary with different economies. Scope of answer should consider internal and external factors to attain top marks within the band. Good application of real-world examples and appropriate use of economic framework to support the analysis with accurate and well-explained diagrams. • Developed explanation of key determinants of actual and potential growth. 9 - 10 8 L2 • Undeveloped explanation of key determinants of actual and/or potential growth with appropriate but incomplete economic analysis. [Developed answer that focuses only on the determinants of actual OR potential growth – max 5] 5 – 7 L1 • Answer that is mostly irrelevant in answering the question, with basic concept errors and inaccurate economic analysis. • Mere listing of points with no or inappropriate diagrams to aid explanation. 1 – 4

2018 JC2 H2 Economics Prelim Paper 2 Suggested Answer Suggested answer for part (b): Question Analysis Command Assess the extent Content Size and openness of economy, choice of macroeconomic policies, achieve sustained growth Context No specific context (“a government”) Synopsis: Students are expected to explain how the size and openness of an economy would affect the choice of macroeconomic policies to achieve both actual and potential growth which would require the application of both demand-management and supply-side policies. The answer should also consider other factors that need to be considered in the choice of policy. Analysis should be supported by ADAS framework with use of examples. Introduction • Define size and openness of an economy: o Size of economy refers to the size of the domestic market and the availability of factor endowment. o Openness refers to the size of flows of go ods and services, capital and labour in the economy. • To achieve sustained growth, the macroeconomic policies adopted must promote actual growth (i.e. AD an