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  act