(2016) A Level H2 Econs Paper 2 Essay Q5

Disclaimer: The answers provided on our website is a 'first draft outline’ version of the answers provided for your convenience.

For the full, finalised answers, please click here to purchase a hard copy of the Comprehensive TYS Answers authored by Mr Eugene Toh and published by SAP. (The page might take awhile to load)

Search for “COMPREHENSIVE ANSWERS TO A LEVEL H2 ECONOMICS YEARLY EDITION” or “9789813428676” to purchase.

5 (a) Explain why macroeconomic policy decision-making is made more difficult by possible conflicts between government objectives.

Introduction

1. Macroeconomic policy decision-making is difficult as governments will often need to decide which objective they want to prioritise since there are almost always trade-offs associated with macroeconomic policies

2. For example, carrying out expansionary demand management policies to increase economic growth and reduce unemployment but can result in higher inflation and worsening of the current account (and thus balance of payments)

3. Vice versa, addressing inflation or a worsening current account (and therefore balance of payments) using contractionary demand management policies can lead to lower growth and higher unemployment

 

Show how use of Expansionary Monetary Policy leads to conflict

1. Governments can use expansionary monetary policy to increase growth and lower unemployment

2. Increasing money supply à lowers interest rates -> encourages Consumption (due to lower cost of borrowing) and Investments (more investments are profitable at lower interest rates) -> increase AD -> increase real NY -> higher economic growth

3. As firms hire more factor inputs to produce the higher output -> increasing hiring of labour -> lowers cyclical unemployment

4. Yet, if the economy is already operating at full or near full employment level, an increase in AD can cause an increase in GPL -> causing demand pull inflation

5. As individuals see an increase in incomes -> they increase buying of imported goods -> causing imports to increase -> worsens current account à worsens BOP

 

Show how use of Contractionary Fiscal Policy leads to conflict

1. To address inflation, governments can use contractionary fiscal policy

2. The government can cut spending by for instance halting government public works projects -> decrease in G -> decrease in AD -> fall in general price levels

3. The government can also increase personal income taxes -> reduce disposable income -> lowers consumption -> decrease in AD -> fall in general price levels

4. Or the government can increase corporate income taxes -> reduce after tax profits -> lowers incentive for investments -> Investments falls à fall in AD -> fall in general price levels

5. The above address inflation by reducing AD.

6. However, a decrease in AD can also lead to a fall in real national income -> lowering economic growth

7. As firms hire less factor inputs to produce the lower level of output -> less hiring of labour inputs -> increase in cyclical unemployment

 

Conclusion

1. Trade-offs in implementing most demand management policies result in a need to pick and prioritise certain objectives over others.

2. Alternatively, there is a need to supplement demand management policies with supply side policies to resolve policy conflicts.
   
   

(b) Assess the relative effectiveness of the alternative macroeconomic policies that the Singapore government could adopt to maintain a low rate of unemployment. [15]

Expansionary fiscal policy

1. To reduce unemployment, Singapore can adopt expansionary fiscal policy

2. The government can increase spending by for instance commissioning new government infrastructural projects like new MRT lines -> increase in G -> increase in AD -> increase in real NY

3. The government can also decrease personal income taxes -> induce disposable income -> increases consumption -> increase in AD -> increase in real NY

4. Or the government can cut corporate income taxes à increase after tax profits -> increases incentive for investments -> Investments increase -> increase in AD -> increase in real NY

5. As firms hire more factor inputs to produce the higher level of output -> hiring of more labour inputs -> fall in cyclical unemployment

 

Effectiveness

1. The above address only cyclical unemployment and not structural and frictional unemployment

2. Small multiplier might mean that any increase in real national income may not be very significant

 

Devaluation of the Sing$

1. MAS can devalue the Sing$ by selling Sing$ on the foreign exchange market

2. This can reduce the prices of our exports, while making imports for locals more expensive

3. Increase in exports sales and fall in import expenditure -> increase (X-M) -> increase AD -> increase real NY

4. As firms hire more factor inputs to produce the higher level of output -> hiring of more labour inputs -> fall in cyclical unemployment

 

Effectiveness

1. Above is subject to Marshall-lerner condition, which Singapore probably satisfies because demand for our exports are quite price elastic as they are relatively substitutable (nature of our exports)

2. However as Singapore imports most of its inputs / raw materials, a weaker currency also makes such inputs / raw materials more expensive, increasing the cost of production and therefore final output prices -> This may negate any gains to export competitiveness

 

Supply side policies

1. Supply side policies can help address cyclical unemployment through increasing export competitiveness -> for example, the government can provide subsidies for firms to adopt technology to increase productivity -> lower cost of production -> makes exports cheaper -> demand for exports increase -> (X-M) increases à AD increases -> reducing cyclical unemployment

2. More importantly, supply side policies can address structural unemployment by providing firms with subsidies to retrain workers so they can take up new jobs in more productive sectors of the economy

3. Supply side policies can also address frictional unemployment for example, government can setup job matching agencies / online job portals

 

Effectiveness

• While supply side policies are better able to address all three types of unemployment, they also take a long time to implement and may not necessarily be effective either.

Found our TYS answers useful?

Maximise your A-Level H2 Economics preparation with the ETG A-Level H2 Economics TYS Crashcourse! Perfect for students looking to enhance their skills in both essay and case study analysis, this comprehensive 3-day crashcourse will cover over 60 essay questions and 20 case studies from the A-Level Economics Ten-Year Series. Whether you're attending onsite or via Zoom, our experienced tutors will guide you through the intricate demands of H2 Economics, offering expert feedback and graded answers. For the best economics tuition in Singapore, sign up now to secure one of the limited onsite seats!