(2022) A Level H2 Econs CSQ 1 Suggested Answers

(2022) A Level H2 Econs Paper 1 CSQ Q1

ai. The drought would have resulted in damage of vegetable and fruit crops (weather) → decrease in supply from SS0 to SS1 → increase in price from P0 to P1

(can explain with price adjustment process)

aii. The bushfires will result in a change in tastes and preferences of tourism (to avoid risk of being affected by smoke / fire) → fall in demand from DD0 to DD1 → decrease in output from Q0 to Q1

(can explain with price adjustment process)

b. The budget position went from a budget surplus in Feb 2020 to a significant / worsening budget deficit in June 2020.

The pandemic resulted in the government having to roll out A$70 to A$90 billion on stimulus, which could have caused an increase in government expenditure, worsening the budget position
OR

The pandemic resulted in negative GDP growth which could have hampered tax collections → fall in tax revenues, worsening the budget position.

c. Real interest rates is given by nominal interest rates minus inflation rate.

Since inflation rate was 2.2%, real interest rates will be 0.25% minus 2.2% which will give us real interest rates of -1.95%

d. A negative real interest rates will likely discourage savings as the consumers will be more inclined to spend than to save. (opportunity cost of spending would have fallen) Savings by consumers will thus fall.

With the negative interest rates it would also likely result in hot money outflows → increase in supply of A$ → depreciation of the A$
OR

As consumers increase spending (and save less) → spending on imported goods also increase → increase in supply of A$ for purchase of imported goods → depreciation of A$

e. Weakening of Singapore’s exchange rates

  1. A weakening of the SGD could result in exports becoming cheaper in foreign currency terms

  2. This could increase demand for SG’s exports → increase (X-M) → increase AD → increase real NY → higher economic growth

  3. Increase real output → firms hire more factor inputs → fall in cyclical unemployment

  4. Increase (X-M) → improvement in BOT

How a stronger exchange rate could beneficial

  1. Stronger exchange rate generally helps with addressing the impacts of inflation

  2. Stronger S$ → imported goods becomes cheaper → reduce imported inflation

  3. Stronger S$ → imported inputs become cheaper → SRAS shift right → reduce cost push inflation

  4. Stronger S$ → fall in demand for SG exports as they become more expensive → fall in (X-M) → fall in AD → Fall in GPL → reduce demand pull inflation

Weakening vs strengthening when the global economy is in deep recession

  1. It must be noted that SG import most of its inputs / raw materials for the production of its exports

  2. Thus, a weakening of the currency, while boosting export competitiveness, will cause imported raw materials to become more expensive, raising cost of production for exporters → this immediately negates most of the positive impacts from a depreciation

  3. It the global economy is in deep recession, it is quite unlikely that significant sources of inflation exists, thus a stronger S$, which serves to address inflation, may not be of use

  4. In addition, if the global economy is in deep recession, a stronger S$ will serve us no good as it makes exports less competitive, potentially worsening the impacts that a global recession could have on SG

  5. Thus - SG usually prefers a zero percent appreciation of the SGD in times of a global recession

f. How fiscal policy could address unemployment

  1. In the case of the pandemic, unemployment is likely cyclical in nature (can reference to Figure 2)

  2. Explain how expansionary fiscal policy would work

    1. Increase G → increase AD → increase real NY → higher economic growth

    2. Decrease personal income taxes → increase C → increase AD → increase real NY → higher economic growth

    3. Decrease corporate income taxes → increase I → increase AD → increase real NY → higher economic growth

    4. Firms will hire more factor inputs to produce higher level of output → fall in cyclical unemployment

Why fiscal policy may not be ideal

  1. Consider the high debt levels → increased spending / decreasing taxes → could increase the debt levels → higher future interest repayments

  2. Consider possibility of crowding out effect

  3. There are some issues that may not be resolved even with increased government spending e.g.

    1. Aviation & tourism are affected due to border closures, thus, government spending may not necessarily lead to recovery of such sectors (elaborate why)

Consideration of alternative policies

  1. Discuss & elaborate on expansionary monetary policy (via lowering interest rates) as an alternative

  2. Interest rates already at record low of 0.25% - there may be very little room to accommodate further interest rate cuts before experiencing a liquidity trap

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