SAJC H2 ECONOMICS 2008 PRELIM EXAMS SUGGESTED ANSWER AND MARK SCHEMES

Paper 1 Case Study Question 1 (a) Compare the change in visitors arrivals from Asia with those from China over the period 2002-2007. [2] Visitors arrivals from Asia and China followed similar changes from 2002 to 2007 however it can be observed that changes in visitors arrivals from China fluctuated more than Asia. (b) In Extract 2, Singapore Tourism Board announced that Revenue Per Available Room (Revpar) grew by 13.1% to reach S$205 for June 2008. Using a demand and supply diagram, explain the rise in Revpar. [4] Revpar can be interpreted as the average revenue (price) of a typical hotel room. Students should be able to identify demand for hotel rooms fell as visitors arrivals fell. However price has increase. Hence students should conclude that SS must have fallen more, maybe due to higher cost of production. Ensure correct diagram is shown, i.e. correct shifts in dd and ss and that price must increase and quantity demanded of hotel rooms fell. Max 2m for wrong or no diagram. (c) Explain the rationale for government intervention in the gambling industry. [6]

Main issue: Issue of overconsumption. Due to divergence in social cost and private cost. Credit student even if they use divergence in social benefits and private benefit as long as they are able to explain the external cost to the society. Also identify imperfect knowledge on ones own benefits and cost in gambling eg tendency to think likelihood of winning is higher or underestimating the cost of risk Private cost: Losses at the table Social cost: private cost + external cost which includes breakdown of family, addiction that leads to fall in productivity, crimes Therefore government should intervene to reduce consumption to the social optimal level (healthier level) Well-explained, showing deadweight loss to the society when there 5-6m is overconsumption of gambling. Relating imperfect knowledge to divergence of cost/benefit curves Able to analyse the external cost associated with gambling which 3-4m resulted in overconsumption Identify overconsumption as the rationale for intervention but 1-2m underdeveloped in explanation

SAJC 2008

(d)

Evaluate the effectiveness of the measures implemented by the Singapore government to solve the market failure in the gambling industry. [8] Students should be able to identify at least 3 forms of intervention. Better students should be able to relate to how it reduces external cost and reduces consumption. Public education Aim to reduce imperfect knowledge by increasing awareness of potential dangers and cost of in gambling (change the perception of private cost and reduce its divergence (difference) to the social cost Evaluate: Might not be effective for those who have an addiction already Counselling Reduce the effects of external cost eg harm to family etc Evaluate: A non-preventive measure which does not reduce consumption, more of reducing the effects. Membership levy Increase private cost of gambling hence effective in reducing consumption Evaluate: Not effective for higher-income group. Effective for lower-income who are more prone to suffer from bankruptcy from gambling but provided they are unable to borrow. Issue of determining what is a good amount for the levy. Exclusion Total ban for individuals with potential higher external cost in gambling. Evaluate: Who should be in the list of exclusion? No advertising or credit extension Prevent misrepresentation of benefits of gambling which would lead to more consumption Evaluate: Other sources of credit available, worse if gamblers turn to loansharks. Limited effect from no advertising as there are many other sources to attract gamblers eg word of mouth. Students should conclude by making a judgment or stand on the use of these policies [1m] Able to relate the measures to dealing with the various market failure 7-8 and assess how effective, pros and cons of the policy. Shows good attempt in evaluating pros and cons of the measures 4-6 but underdeveloped in relating measures to how it will reduce consumption/ market failures Mere description of measures with little or no relevance to how it will 1-3 reduce consumption and poor attempt at evaluation.

SAJC 2008

(e)

Identify the present challenges in Singapores tourism industry and assess to what extent Singapores upcoming integrated resorts is effective in dealing with these challenges.

[10]
Present challenges in Singapores Tourism Industry and explain the underlying reasons that need to be addressed to attract future tourists Identify that Singapore might be losing its long-standing customers in rich Western countries and recognize that they need to attract newly affluent travelers from the fast-growing emerging economiesnot just Dubai but also the BRICs (Brazil, Russia, India and China) and others, such as South Korea and Vietnam as well as compete with them in the tourism market. Explain the reasons for decline in rich western travelers: - Slowdown of the economy (fall in income and hence fall in demand for luxury goods (income-elastic) and the impact of the high price of oil. Reasons for loss in tourists arrivals and expenditure: global economic slowdown, as well as rising inflation and oil prices, which in turn may have impacted consumers discretionary spending. Other reasons terrorism, environment Evaluate to what extent can integrated resorts be effective in addressing these challenges? Effective because: i) Research shows tourist numbers and spending do increase with the development of casino-resort. In Singapores case, proponents argue that having a casino might increase the average length of stay of tourists, entice them for repeat visits as well as attract a new group of high-rolling tourists to Singapore. ii) In light of plans by Macau and South Korea to liberialise the gaming sector further, there are concerns that Singapore would see further erosion in tourist arrivals and lose out if the integrated resort-casino is not developed. So with the development, Singapore can stay competitive and attractive to the world. Tourists interested in gambling and resorts will come to Singapore. iii) Government revenue gained from tax on casino profits can be used to develop infrastructure and other tourism development Not effective because Tourists arrival still depend on other factors: i) Nature of tourism, PED>1 so economic slowdown is still a major role in determining future tourist arrivals. ii) Dependent on the development of substitutes eg regional casinos, themeparks iii) Inflation and strong Singapore dollar due to the increase in C, I and

SAJC 2008

X(export of services) might reduce Singapores attractiveness in attracting tourists. Will provide a balanced view and able to explain the underlying 4-6 reasons how IR can affect tourism arrivals, expenditure. Shows some attempt to evaluate when it is not effective. Mere lifting of passage of how IR can benefit Singapores tourism 1-3 industry. No or little mention of when it will not be effective Will apply sound economic analysis to make a judgment on the E2 3-4 effectiveness of the IR to Singapore tourism Will attempt to make a judgment based on the analysis. E1 1-2

SAJC 2008

Paper 1 Case Study Question 2 (a) (i) Compare the trend of US trade deficit and US$ exchange rate from 2000 [2] to 2006. Trade deficit rising while exchange rate depreciated against major currencies (2), move in opposite direction (1) (ii) Explain one reason for the trend of US trade balance. Rising imports due to rising affluence OR falling exports due to unfair trade practices by foreign countries (2) (iii) Examine the impact of the US trade imbalance on US$ exchange rate. - Rising trade deficit implies a fall in exports or an increase in imports (or both) - Leads to fall in demand for US$ and a rise in supply of US$ - Pressure on exchange rate to depreciate (b) To what extent can the Theory of Comparative Advantage explain [5] changes in investment inflow and outflow from the USA? - Theory of CA is defined as the specialisation of production that a country has a lower opp cost in and trade subsequently with another country (2) - US has lost jobs in service sector jobs in call centres to India and blue-collar factory jobs to China or Mexico. (2) - However, rising investments in US by companies (could be due to tariffs or protectionistic measures imposed by US) (if written, student deserve a 5!) Note: if no CA definition, max 4 marks If only talk about inflow and outflow of investments without talking about extent of the CA, max 4 marks [3] [2]

(c) (i)

Explain how a government can maintain a fixed exchange rate system. By intervening in the currency market by buying and selling of the domestic currency using forex reserves Intervene (1), using forex (1)

[2]

(ii)

Discuss whether a revaluation of the Yuan will improve the US trade [6] imbalance. A revaluation of the Yuan increases the price of US imports from China in US$ which makes it more expensive for US consumers to import from China which will deter US imports from China However,

SAJC 2008

- Chinese imports only form one-third of the increase in US deficit - US workers are forced to accept pay cuts and lower their income, or even lose their jobs as firms move abroad - two-third of Chinese exports come from foreign firms L1 1-3 L2 4-6 One sided argument or limited analysis Balanced argument with good analysis of the effects of revaluation on US trade Based on the information given, should the US government adopt a [10] protectionist approach towards trade? - A revaluation of the Yuan may not be effective as China only accounts for one-third of US total deficit - Hence protectionism may be useful in reducing the trade deficit and improve the economy by making imports more expensive, not just from China, but from the rest of the world - Protectionist measures could be tariffs to raise the price of imports to make it more expensive, hence switching consumers expenditure towards relatively cheaper domestic production which will increase their employment and income However, US goods abroad face possible retaliation or US consumers may suffer from higher prices of goods whether imported or domestically produced, and the US economy suffers from inefficient firms in the LR L1 1-3 Limited analysis or one sided argument about whether should US use protectionism Balanced approach with substantiation on the positive and negative effects of protectionistic measures to the US economy Evaluation without judgement Evaluation with judgement

(d)

L2 4-6

E1 1-2 E2 3-4

SAJC 2008

2008 JC2 H2 ECONOMICS PRELIM EXAM PAPER 2 (ESSAYS) QUESTIONS, SUGGESTED ANSWER AND MARK SCHEMES 1 Discuss the importance of the various elasticity concepts to a governments economic policies. [25]

Briefly explain the different elasticity concepts (including PES) The different elasticity concepts could be used to formulate relevant economic policies in order to: Obtain stable and sustained economic growth: e.g. PED will help to determine how much tax to impose, for C to fall, in the case of overheating economy; YED will help to determine how much consumption increases when disposable income increases. Ensure income equity: e.g. PED can be used to identify the types of goods to tax through identifying incidence of taxation/subsidy, it can also be used to gauge amount of surplus/shortage in the case of price floor/ceiling, PED can also be linked to effects of GST Ensure social efficiency: e.g. PED can be used to measure how much taxes and subsidies should be imposed in order to reallocate resources to achieve social efficiency OR encourage/discourage consumption/production

To assess effectiveness of economic policies: Policy Monetary Elasticity Concept and Importance: Elasticity of MEI and LP (Note: students can further discuss if MP should be implemented in Singapore in the first place) Price elasticity of demand of exports and imports (MLs condition) and Balance of Trade/Balance of Payment. Cross elasticity of demand and effects on trade between countries (substitutability of goods produced in different countries) Fiscal Income elasticity of demand and direct taxes Price elasticity of demand and subsidies for producers Supply side Expenditure switching Price elasticity of demand and indirect taxes/subsidies Cross elasticity of demand

Exchange Rate

SAJC 2008

Level Low L1 High L1

Low L2

High L2

Low L3

High L3

Descriptors Answer mostly irrelevant & contains only a few valid points made incidentally in an irrelevant context Show some knowledge but does not show that meaning of question has been grasped. Basic errors of theory. Show ability to identify facts, draw graphs & apply laws to new situations Accurate but undeveloped explanation of facts related to question and theory. Logical explanation not clear Not much evidence of highlighting unstated assumptions, nor examine implications of a hypothesis, nor organize ideas into a new unity Some ability to discriminate & form elementary judgements The answer has more relevance to question but theory is not fully explained. Candidate discusses 2 different policies Good knowledge of facts & theory. Discuss at least 3 different policies Clear evidence of ability to apply facts & theory with accurate reference to question. Examined implications of question or hypothesis Tried to distinguish facts from value judgements Clear statements; reasoned structure & reasoned arguments Attempt at conclusion to question But not many extra illustrative points Not too much critical comment No recognition or comment on unstated assumptions Thorough knowledge of facts & theory. Excellent ability to explain: precise, logical, reasoned Query some of the assumptions New illustrations and examples

[25] 1-5 6-9 1011

1214 1517

1821

Level Descriptors E2 E1 Judgement based on analysis Mainly unexplained judgement

[25] 3-4 1-2

SAJC 2008

Large firms enjoy lower costs thus they can charge lower prices. (a) Explain why large firms may enjoy lower costs. [12]

Explain large firms and lower costs ( lower AVERAGE costs) Explain how lower costs comes about (through expansion of firms output) Discuss AT LEAST 3 different types of internal EOS, with relevant examples Draw LRAC diagram to illustrate (a) [12]

Level Descriptors Answer mostly irrelevant & contains only a few valid points made Low incidentally in an irrelevant context L1 High Show some knowledge but does not show that meaning of question has been grasped. L1 Basic errors of theory. Show ability to identify facts, draw graphs & apply laws to new situations Accurate but undeveloped explanation of facts related to question Low and theory. Logical explanation not clear L2 Not much evidence of highlighting unstated assumptions, nor examine implications of a hypothesis, nor organize ideas into a new unity Some ability to discriminate & form elementary judgements High The answer has more relevance to question but theory is not fully explained. L2 Good knowledge of facts & theory. Candidate explains at least 3 different types of internal EOS. Low Clear evidence of ability to apply facts & theory with accurate reference to question. L3 Examined implications of question or hypothesis Tried to distinguish facts from value judgements Clear statements; reasoned structure & reasoned arguments Attempt at conclusion to question But not many extra illustrative points Not too much critical comment No recognition or comment on unstated assumptions High Thorough knowledge of facts & theory. Excellent ability to explain: precise, logical, reasoned L3 Query some of the assumptions New illustrations and examples

1-2 3-4 5-6

7-8 9-10

11-12

(b) Discuss the view that large firms are beneficial in view of the cost-savings they enjoy. [13] Explain how large firms could benefit society through cost-savings (e.g. lower prices, better utilization of resources a.k.a. lesser excess capacity)

SAJC 2008

Evaluation: However, large firms are unlikely to pass cost savings onto consumers (unless there is high contestability which is also possible). Instead, they may use their increased profits (from cost savings) to engage in product development and advertising. Students may thus discuss the pros and cons of both. Eventually, whether large firms are valued and beneficial depends on the value consumers place on variety and prices respectively. In their discussion, students should give examples of how such practices have benefited society (e.g. supermarkets that charge higher prices can provide healthier choices and be more environment-friendly, drug companies can use supernormal profits for research and development of new drugs, etc) Students must recognize that despite these possible advantages, large firms are largely allocatively inefficient hence they may conclude that given this, large firms are unlikely to be beneficial to society.
Level Low L1 High L1 Descriptors Answer mostly irrelevant & contains only a few valid points made incidentally in an irrelevant context Show some knowledge but does not show that meaning of question has been grasped. Basic errors of theory. Show ability to identify facts, draw graphs & apply laws to new situations Accurate but undeveloped explanation of facts related to question and theory. Logical explanation not clear Not much evidence of highlighting unstated assumptions, nor examine implications of a hypothesis, nor organize ideas into a new unity Some ability to discriminate & form elementary judgements The answer has more relevance to question but theory is not fully explained. Good knowledge of facts & theory. Clear evidence of ability to apply facts & theory with accurate reference to question. Examined implications of question or hypothesis Tried to distinguish facts from value judgements Clear statements; reasoned structure & reasoned arguments Attempt at conclusion to question But not many extra illustrative points Not too much critical comment No recognition or comment on unstated assumptions Thorough knowledge of facts & theory. Excellent ability to explain: precise, logical, reasoned Query some of the assumptions New illustrations and examples Descriptors Judgement based on analysis Mainly unexplained judgement (b) [13] 1-2 3-4 5

Low L2 High L2

6 7-8

Low L3

High L3

Level E2 E1

[13] 3-4 1-2

SAJC 2008

10

(a)

Explain why market dominance lead to market failure.

[10]

Suggested answer: Define market failure. Brief description of firms with market dominance (oligopolies or monopoly). Explain allocative efficiency and why is it achieved at P=MC. Explain how market dominance leads to downward sloping demand curve and at the profit maximization output, P>MC, allocative inefficiency occurs. Outcome: In this case, there is under-allocation of resources and underproduction of goods. More resources should be allocated to the production of this good. Draw diagram to illustrate clearly how monopolists P and Q differ from allocative efficient price and output. Some other valid points: Monopoly can be allocative efficient when it practices perfect price discrimination. However there is zero consumer surplus. Other possible points on market failure that can be potentially caused by market dominance: Inequity due to market dominance is likely to occur as the monopolists price is too high and will result in only the rich being able to afford it. The poor who actually benefit more from the good may not have the ability to buy it thus misallocation occurs. Monopoly can be potentially productive efficient however market dominance may made them complacent and has lack of incentive to produce at the least cost factor combination thus they could be productive inefficient.

Level Descriptors Mainly descriptive on market dominance and its market outcome with no or little relations to allocative efficiency. Many conceptual errors L1 Accurate but underdeveloped in explanation of why firms with market L2 dominance are allocative inefficient. Only some minor conceptual errors. Well explained and clear explanation of how market dominance leads to L3 market failure. Show ability to relate and explain allocative (even productive) efficiency well.

(a) [10] 1-4 5-6 7-10

SAJC 2008

11

(b)

Discuss the view that the Singapore government should always intervene in correcting the above market failure. [15]

Explain what the government objectives are to ensure social efficiency and prevent exploitation of consumers through unfair practices. More specifically would be to reduce monopolists prices and increase its output. Explain how the government may intervene through regulation such as MC or AC pricing for natural monopoly, deregulation or liberalization to increase competition and fair practices, legislation, Competition Act, etc Analyse the pros and cons of each of the methods of intervention (e.g. lower prices, greater variety, quality standards, etc) and assess the effectiveness of government intervention especially in achieving the goal of allocative efficiency. Evaluate on the cases when market dominance should be allowed to exist and hence government should not intervene or might result in government failure. In the case of a natural monopoly When monopoly charges lower and has a higher output at MR=MC than a PC firm operating at P=MC due to the significant EOS that reduces their average cost. Stronger candidates can relate to MES of an industry that determines largely the size of the firm and size of the market Level Descriptors Mostly description of inappropriate policies to deal with market L1 dominance. Outcome of intervention not effective in solving underproduction and high prices. Insufficient discussion on relevant policies. Shows some attempt to give a balanced viewpoint on whether L2 government should always intervene but underdeveloped in explanation. Shows some knowledge in appropriate policies (at least 2) to deal with market dominance and a good attempt in analyzing the pros and cons of the policies. Provided a balanced viewpoint on whether government should always L3 intervene. Good knowledge in appropriate policies to deal with market dominance in the Singapore context and a good explanation of the pros and cons of the policies with recommendations on how to resolve the potential side-effects if they were to intervene. Level Descriptors E2 Well-explained judgment on the situations when government should intervene and when they should not using relevant concepts and theory. Unexplained or incoherent judgment on whether Singapore government should intervene. (b) [15] 1-5

6-8

9-11

[15] 3-4

E1

1-2

SAJC 2008

12

In recent years, Singapore has been developing new sources of economic growth, such as biomedical sciences, digital and interactive media, environmental and water technology and attracting high-profile events such as the F1 Formula race and winning the bid to host World Youth Olympics. (a) Using a relevant economic theory, explain how these industries and events can affect Singapores equilibrium level of national income. [10] Discuss the extent to which their resultant economic growth conflict with other macroeconomic objectives. [15]

(b)

Part (a) Suggested Answer and Mark Scheme 1. 2. 3. 4. Explain briefly the concept of equilibrium and equilibrium level of national income Explain how the new industries and events (identified in preamble) boost C, I, G, (X-M) and thus AD as well as LRAS (via I, R&D). Identify the relevant economic theory as Y=AE or AD-AS model. Use Y=AE model (diagram) or AD-AS analysis to show how an increase in AE or AD respectively, via the multiplier process, can lead to a more than proportionate increase in equilibrium level of national income. The concept of multiplier should also be explained. No need for numerical examples. 7-10 marks For an analysis that explains in detail how new industries and events affect each component of AD and LRAS, synthesising and leading to a more than proportionate increase in equilibrium level of national income, using either Y-AE model or AD-AS model. Maximum 7 marks if only AD shifts (but no AS shift) or vice-versa. For an understanding of the cause and effect relationship, but limited in coverage of answers For a descriptive knowledge of the basic cause and effect relationship, but with no economic framework (i.e. AD-AS or Y-AE)

L3

L2 L1

5-6 marks 1-4 marks

Part (b) Suggested Answer and Mark Scheme 1. 2. 3. 4. Identify the other macroeconomic objectives, besides economic growth (EG) Thesis: How EG conflicts with other macroeconomic objectives Antithesis: How EG does NOT conflict (even complement) other macroeconomic objectives Synthesis (including evaluation): Whether EG conflicts or complements more with other macroeconomic objectives, with reasoning

SAJC 2008

13

Low U

Low CPI Favourable BOP

Conflict If EG is driven by economic restructuring to higher valueadded industries, it can worsen structural U (short-run) AD DD-pull inflation if economy is already near fullemployment national output EG import growth too and worsens current account and BOP positions

Complement Reduce cyclical U via AD

Will not DD-pull inflation if there is excess capacity in economy or LRAS expands If EG is mainly export-driven, then BOT, current account and BOP positions can improve

L3

9-11 marks

For a well-balanced analysis reflecting the extent to which EG, including sustainable growth, conflicts and complements other macroeconomic objectives in Singapores context For an understanding how EG conflicts or complements with other macroeconomic objectives but little or no discussion on the extent to which EG conflicts For a descriptive knowledge of how EG conflicts with other macroeconomic objectives only. Alternatively, meaning question is not grasped or largely irrelevant answer. of

L2

6-8 marks

L1

1-5 marks

E2

3-4 marks

Judgement based on analysis. Does resultant economic growth conflict or complement more with other macroeconomic objectives? Why? Unexplained judgement

E1

1-2 marks

SAJC 2008

14

If budget deficit is a problem, then a budget surplus is not a problem. Discuss. [25]

Suggested Answer and Mark Scheme Basic Approach: 1. 2. 3. 4. 5. Briefly explain what a government or public budget is, budget deficit and budget surplus as part of fiscal policy Explain why/how budget deficit is not a problem Explain why/how budget deficit is a problem Explain why/how budget surplus is not a problem Explain why/how budget surplus is still a problem

How budget deficit occurs: Governments need to meet the shortfall in revenue collections to fund government expenditure by: 1. borrowing from the public (as in Japan), which leads to rising public debt; or 2. borrowing from abroad, which leads to rising foreign debt; or 3. drawing down on fiscal reserves accumulated from past annual budget surpluses. Why/how can a budget deficit NOT be a problem? 1. 2. A mild or one-time off budget deficit may be necessary in times of recession to stimulate economic recovery. If the enabled government expenditure is on infrastructure development which grows LRAS and shifts PPC outwards, thus enhancing long-term economic growth potential. If the government spending is used to reduce income gap, e.g. more economic restructuring shares and growth dividends by Singapore government to lower income groups, means testing in public hospitals.

3.

Why/How can a budget deficit be a problem? It is either chronic (as in Japan and HK) and/or deep (as in USA) Chronic and/or deep public and/or foreign debt becomes problematic because: 1. 2. 3. Government incur more interest charges for borrowing from public or abroad Sovereign creditworthiness is reduced by international credit rating agencies, which makes it more difficult and/or costly to borrow in future Governments find it politically difficult to reduce the debt as over-expenditure on vested interests in the economy becomes entrenched

SAJC 2008

15

4. 5.

Future generations of taxpayers will have to repay debt if debt is severely deep as in USAs case Lack of surplus funds to invest in education & training, infrastructure development and R&D, curbing long-term economic growth potential.

Why/How is a budget surplus not a problem? 1. A budget surplus avoids the above problems that a country saddled with a deficit experiences 2. Its annual surplus can be accumulated as part of the economys fiscal reserves to save for a rainy day 3. Its annual surplus can be used to reduce or pre-pay foreign debt that the government has incurred in the past (e.g. India) 4. Surplus can enable a government to preserve and promote countrys vital interests, e.g. defence and security, education & training, healthcare, economic competitiveness 5. Good creditworthy rating by international rating agencies, enabling the government to incur lower interest rates should it decide to borrow in future Then, why/how can a budget surplus can be a problem? 1. Opportunity cost incurred if current needs/vital interests of the country are not met or being compromised by under-spending, e.g. forgo infrastructure development. 2. More G expenditure may be needed to stimulate economy in times of slowdown, sluggish growth or recession. A policy of accumulating surplus restricts fiscal policys use as a counter-cyclical tool. 3. In Singapores case, due to the public sectors culture of fiscal prudence, whereby annual expenditure is less than budget allocated, fiscal policy is considered to be often deflationary, which is also problematic. Evaluation Having considered both thesis and antithesis, on balance, incurring a budget surplus is less problematic than a situation whereby budget deficit is incurred, especially when the deficit becomes chronic, structural and/or severe. This is because the consequences the present and future generations of taxpayers are more severe.

SAJC 2008

16

L3

15-21 marks For a well-balanced answer that not only provides an in-depth analysis of the quote, but also discusses why and how budget deficit need not be a problem and why/how budget surpluses can be problematic. 10-14 marks For an understanding of why deficit can be a problem whereas surplus is not (thesis), but with little or no discussion of the antithesis. 1-9 marks For a mere description without use of economic reasoning, or for largely irrelevant answers and shows that the meaning of the question is not grasped. Judgement based on analysis Unexplained judgement

L2

L1

E2 E1

3-4 marks 1-2 marks

SAJC 2008

17

With asset prices falling in many key markets, soaring energy and commodity prices stoking inflation, and global growth on a downturn, the world faces some difficult policy choices. - IMF First Deputy Managing Director John Lipsky, 22nd July 2008 (a) (b) Explain the macroeconomic impact of the above on Singapore. [12]

Assess the policies that the Singapore government can adopt to reduce the harmful effects of these problems. [13]

Part (a) Suggested Answer and Mark Scheme 1. 2. Asset (property & stock) prices falling wealth effect C imports QX of goods and services from Singapore X Soaring energy & commodity prices Pm for Singapore Qm (Law of DD) Because of Singapores lack of natural resources and thus heavy reliance on imports, PEDm < 1. Thus, Qm is proportionately less than Pm So Pm X Qm = M Global growth on a downturn X and I (less profits & investment funds) Combined effect on C, I, X, M AD and LRAS (via I) (AD-AS diagram) Explain further impact on Singapores external economy: X - M = BOT Current account position , ceteris paribus Also, capital & financial account position (due to I) BOP position , ceteris paribus SGD depreciates against foreign currencies FX reserves Explain further impact on Singapores domestic economy: AD via downward (or reverse) multiplier-accelerator process more than proportionate in equilibrium level of national income => Economic growth AD Derived demand for factors of production N or U Leftward shift of LRAS (due to I and cost of production due to imported inflation) is greater in magnitude than leftward shift of AD curve GPL => Inflation L3 L2 L1 9-12 marks 5-8 marks 1- 4 marks For an in-depth analysis of macroeconomic impact on Singapores external and domestic economy using AD-AS framework For an understanding of impact on either Singapores domestic or external economy or both but limited in range of points For a descriptive knowledge of the impact without economic framework or largely irrelevant answers or that meaning of question is not grasped.

3. 4. 5.

6.

SAJC 2008

18

Part (b) Suggested Answer and Mark Scheme As time can only permit candidates to analyse at least 3 policies, they should choose at least one AD policy and at least one AS policy for a balanced answer. Acceptable AD policies: 1. 2. Expansionary Fiscal Policy via G and/or T Depreciate SGD to PX or appreciate SGD to imported inflation

Acceptable AS policies: 1. Measures to boost productivity growth to exceed wage growth so that ULC to improve export competitiveness. These measures include education and training, infrastructure development & R&D. Acceptable AD-AS Policy: 1. Measures to promote investments AD and LRAS

While candidates are encouraged to evaluate the strengths and limitations of each policy before discussing the next policy, those that reserve evaluation at the end of their essay should also be duly awarded evaluation marks. L3 L2 L1 7-9 marks 5-6 marks 1-4 marks For a well-balanced analysis that considers appropriate AD and AS policy responses that reduce the harmful effects of problems For an understanding that considers either AD or AS policy solutions or even both but limited in range of points For a mere description of policy solutions without linking to how they reduce the harmful effects of the problems. Alternatively, for a largely irrelevant answer or shows that meaning of question is not grasped. Judgement based on analysis Assess strengths and limitations of each policy, or which policy can be most effective, efficient and appropriate in Singapores context, or that policy responses may not completely solve, but only reduce severity of harmful effects, depending on the duration and severity of global slowdown / recession / stagflation For an unexplained judgement, or one that is not supported by economic analysis

E2

3-4 marks

E1

1-2 marks

SAJC 2008

19