HCI_H2_ECONS_CSQ2_ans

HWA CHONG INSTITUTION C2 Preliminary Examination 2016 Higher 2 Economics Case Study Question 2: The Pains and Gains of Economic Restructuring Suggested Answers (a) Explain why the Chinese are 'concerned over the formation of real estate bubbles'. [2] 1. If the real estate bubbles were to bur st, prices of housing would fall. (1m) 2. Consumers would feel less w ealthy OR consumers would have to cut down on expenditure to pay their debts, thus cutting consumption and reducing AD, adversely affecting actual growth/national income. (1m) - OR well elaborated point (2), explaining why C decreases and its impact on national income (standard of living is also be accepted) can be given 2m Note: Explanation on macro impact is non-negotiable (b) From Extract 6, comment on the likely change in China’s multiplier value after restructuring. [4] The k value can be calculated by 1/(1-MPC) or 1/MPW. Original APC is 0.36. Using this as a proxy (1m), it is likely that the k value is below 2 initially. (k = 1/(1-0.36) = 1/0.64 = 1.56.) OR MPS is likely to be high due to high precautionary savings and thus the k value is likely to be low. Explain that MPS is likely to decrease because “i mprovements in health and pension coverage” will reduce the need for high pr ecautionary savings and hence reduce the necessary savings ratio (APS). Reduction of APS can be used to predict reduction of MPS. This will possibly increase the MPC (MPC = 1 – MPS or students can explain the urbanisati on may result in growth of middle class  tends to increase MPC as Y increases from low to middle income level) and thus increase the k value. (3m – ability to explain the change in the value of k) Note: No proxy – max of 3m. Comment – the usage of proxy to comment on the likely value Credit for relevant evaluative comment (but it is not a requirement) (c) ‘Restructuring for higher productivity will be a risky and painful process for companies’. (Extract 7) Explain the above statement. [4] Students need to show understanding that “risky” and “painful” to companies will be in the form of impact on firms’ profits. Cutting foreign manpower growth and imposing higher levies may increase wages and lead to increase in variable cost of production Investment for productivity e.g. using productive capital goods – increased fixed cost. Overall increase in MC/AC  reduce profitability Show understanding that it may not lead to lower marginal costs in future and hence may not increase profits/ uncertainty on the returns on capital equipments (idea of risk) Note: revenue reasons can also be accepted. 2m – for well-developed explanation for change in COP 1m – for profitability 1m – idea of risk Note: Very well developed explanation, provided explanation on change in fixed and variable cost (3m) + impact on profits (1m) up to 4marks

(d) Compare the trend of unemployment rate and youth unemployment rate