(2016) A Level H2 Econs Paper 1 CSQ Q2

a.     Consumer prices in Brazil increased, but at a decreasing rate, while consumer prices in Japan fell, but by a smaller extent compared to previously.

b.     Draw demand supply diagram, with supply curve shifting left (pivoted shift) due to the sales tax.

1.     Draw 2 demand curves, one PED<1 , the other PED>1

2.     If demand is price inelastic, the size of the increase in price will be greater as suppliers can pass on the increase in tax to consumers

3.     If demand is price elastic, the size of the increase in price will be greater as suppliers will bear more of the burden

c.      

i.      AD is increasing (Higher G due to increased government spending, higher C due to higher consumer incomes giving rise to greater purchasing power)

AS is stagnant
OR

SRAS is decreasing (shift up due to measures to increase employment causing higher labour costs)

This leads to prices to increase, causing demand pull and/or cost-push inflation 

ii. 

1.     Strengthening US & EU economies could mean that consumers in these countries could be seeing increase in incomes, which may lead to increase in demand for Brazil’s exports. Increase in (X-M) lead to increase in AD, since economy is already at full employment, demand pull inflation will occur OR

2.     Strengthening US & EU economies could lead to appreciation of the USD/EURO (stronger investors confidence), this could mean that the Brazil currency will depreciate in comparison with USD/Euro, bringing about more expensive imports for people in Brazil, since USD/Euro is more costly to buy

d.

Identify problems of Japanese economy  

1.     sluggish growth

2.     higher unemployment

Explain interest rate policy – expansionary monetary policy
Increase MS à lower interest rates à C & I increase à AD increase à real NY income via k à  higher economy growth, lower unemployment
(also deals with deflation since prices will likely trend higher)

Not likely to be effective due to 
1.   Liquidity trap – interest rates are already very low in Japan, increasing money supply may not significantly bring down interest rates much, may not do much to improve C & I
2.   Pessimism – Expectations of consumers of deflation may continue to deter the Japanese from spending

3.     Japan had to resort to QE, and fiscal stimulus on top of conventional monetary policy due to limited effectiveness of expansionary monetary policy

e.

Stand: Brazil has a more damaging and persistent problem compared to Japan
1.         The extent of the inflation in Brazil is higher (4.9% – 6.2%) in general than Japan (0.36% to 2.67%)

2.         Brazil’s inflation was consistent and over a longer period of time (2009 – 2014) while Japan’s inflation seemed one-off (marginal in 2013, and 2.6% in 2014)
3.         Brazil’s inflation problem was more structural in nature (stagnant production coupled with welfare benefits which gave rise to high consumption) while Japan’s inflation problem was largely due to the sales tax (if effects of sales tax was excluded, increase in prices was 1.3% rather than 3.3%) + Japanese consumers had persistent deflation expectations which were likely hard to change

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