Professional Documents
Culture Documents
Mark Scheme
Question 1
(a) Describe the changes in house prices in Singapore from 2005 to the end of
2008. [2]
House prices increased at an increasing rate from 2005 to 3rd qtr of 2007 and
then increased at a decreasing rate till 2nd qtr of 2008. From the 2nd qtr to the
end of 2008 house prices fell.
(b) Explain the likely value of the price elasticity of supply of houses in Singapore. [2]
(c) With the help of a diagram, explain how high global fuel and commodity prices
resulted in inflationary pressures in the country. [4]
High global fuel and commodity prices high cost of production since
Singapore is reliant on imported fuels and commodities in its production
process AS increases AS shifts to the left AD exceeds AS , hence
exerting upward pressure on the general price level cost push inflation.
(d) Using economic analysis, explain how inflationary pressure and the financial
crisis have affected house prices. [6]
Inflation rate increased due to rising global fuel and commodity prices cost
of production increased AS shifts to the left
The global financial crisis resulted in world wide fall in income Xs fell AD
shifts down
The rise in the unemployed numbers would mean that some people would not
be able to meet their mortgage repayments and would have their houses
repossessed supply of houses increased in the market.
This increase in supply coupled with low demand as people are less confident
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of their ability to pay up their housing loans or to meet mortgage
requirements house prices fell.
(e) Using the information provided in Extract 1, explain the impact of changes in [5]
house prices on the macro economy.
Houses are a form of wealth for most people. A change in house prices has a
significant impact on consumer wealth and consumer confidence hence
consumer spending is affected.
Rising house prices allow home owners to remortgage their houses and have
cash for spending. Also, home owners would feel richer when house prices
soar since houses are the biggest form of wealth for them. Hence C
increases stimulating the economy national income and employment level
would increase.
(f) (i) Explain one measure the Singapore government has taken to boost the
housing market. [3]
Or
Or
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(ii) With reference to the data provided where appropriate, and the
microeconomic goals of the government, discuss whether there is
justification for intervention in the housing market. [8]
Since price of public housing is below the market price, demand will
exceed supply. There is therefore need to impose restrictions like ceilings
on household incomes for eligibility to purchase and criteria for subsidies
in order to better direct the assistance to the lower income group.
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However, a boom may result in high house prices and threaten the
formation of an asset bubble in the country. Hence, there is a need for
the government to keep watch over house prices and intervene to control
the rapid increase in prices. Measures such as tightening loans and
releasing more land to build houses would decrease the demand and
increase the supply of houses respectively preventing house prices from
soaring to reach heights which would be beyond what the first-time
buyers can afford. Soaring house prices may lead to overheating in the
economy and threaten stability.
House value appreciates with the country’s growth, the benefits of growth
percolate to the lower income groups as well. This contributes equity and
social stability.
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and evaluation of the actions. Answer arrives at a clear
and reasoned conclusion.
Question 2
(a) (i) Compare US trade balances with China and with the world for the
period 2005 to 2008. [2]
US trade balances with China and with the world were in deficit.
The trade deficit with China increased throughout the period while the
trade deficit with the world increased from 2005 to 2006 and then
improved from 2007 to 2008.
(ii) How does the value of the Chinese currency in 2008 compare to its
value in 2000? [1]
(iii) Based on the data on US trade, what evidence is there to suggest that
a revaluation of the Chinese currency against the US dollar may not
correct US trade imbalance? [3]
(b) Explain how the trend in China’s foreign reserves is affected by the changes
in the indicators as shown in Table 3. [4]
2 marks for giving a brief explanation of how a change in each indicator can
cause the reserves to increase.
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(c) Discuss whether the US government’s decision to boost tariffs on Chinese-
made tyres can be justified in terms of economic theory. [8]
The call to increase tariffs on Chinese tyres is an attempt on the part of the
US to correct the trade deficit with China. There is claim that the
undervaluation of the yuan has made Chinese goods much cheaper in the
US large influx of imports from China trade deficit with China. In
addition, as US producers find it difficult to compete with the cheaper
Chinese product, there would be lay offs unemployment in the US.
The imposition of higher tariffs on Chinese tyres would raise the price of
imported Chinese tyres in the US, resulting in reduced amount of Chinese
tyres imported into US improves US trade deficit with China. Also, as
domestic producers are protected from competition from China domestic
production is stimulated jobs are not just saved but more jobs can be
created.
US’s decision would hurt not just China but the US economy. It is certainly
not justified especially if China has the comparative advantage in producing
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tyres. If the US cannot produce tyres at a lower opportunity cost than China,
then the tariff would result in inefficient use of resources in the US leading to
higher opportunity costs.
L1 Sketchy answer with some reasons why tariffs are imposed 1-3
and advantages and disadvantages of protectionism with
hardly any reference to the context
L2 Clear explanation of the reasons behind the imposition of 4-6
tariffs and the advantages and disadvantages with reference
to the context
L3 Discussion of the advantages and disadvantages of the tariff 7-8
proposal with application and reference to the context and
the relevant economic theory
(d) (i) Explain the relationship between China’s current account balance and
its economic growth rate as observed in Table 3. [4]
(ii) With reference to the data where appropriate, assess whether the
increase in China’s GDP is primarily due to its rising exports to the
rest of the world. [8]
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LR potential growth
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Question 3
Despite an average growth rate of nearly 8 per cent from 2004 to 2007, Singapore
was the first East Asian country to fall into a recession from the current global
economic crisis after July 2008.
Sandre Thangavelu, January 5th 2009
Explain how the current global economic crisis has caused the Singapore
economy to fall into a recession and assess the effectiveness of the measures
adopted by the government in solving the problem. (25)
Analysis of Question:
Command words: explain – clear explanation of how the global crisis caused
recession, assess – analyse and judge the various measures used to solve the
recession problem.
Key words: global economic crisis, recession, policy measures
Context: Singapore economy
Introduction: Explain the meaning of recession and the impact on Singapore given
the characteristics of the Singapore’s economy.
A recession occurs when there is a fall in an economy’s real GDP for at least 2
consecutive quarter period. Singapore being a very small and open economy which is
highly dependent on trade, suffered adversely from the global economic crisis which
started in the USA. This global economic crisis has led to a fall in Singapore’s real GDP
and caused a recession in Singapore in 2009.
Development
•Explain how the global crisis caused a fall in Singapore’s export.
-Global slowdown led to a fall in demand for Singapore’s export, which is an important
component of AD.
-as world income fell, world’s demand for consumer goods fell. This led to a fall in
demand for Singapore’s electronic consumer goods as well as a fall in demand for
electronic components such as integrated circuits / disk drives etc which are the main
manufacturing exports of Singapore.
-in addition, services sectors are also affected,eg. tourism, financial, port services as the
purchasing power fell.
-thus, when fall in export revenue > fall in import expenditure, net export will fall, ceteris
paribus, AD will fall.
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Global recession has adverse effect on the Singapore economy, given our heavy
reliance on trade and FDI. This leads to negative economic growth in Singapore,
affecting the standard of living of the citizens and worsened the BOP. Thus, the govt
used various policies to mitigate the negative impact caused by the global slowdown.
•Explain the various policies used by the Singapore government to reduce the
negative impact of recession.
-Singapore govt has implemented various policies to reduce the negative impact of the
global recession on Singapore’s economy. Govt uses both expansionary fiscal policy,
exchange rate policy as well as supply-side policies to address the problems.
i) Explain the use of expansionary fiscal policy to mitigate the impact of recession
Expansionary fiscal policy is one of the important policies adopted to stimulate AD to
avert the recession. Govt spending increased and taxes were reduced.
Eg. govt spending on infrastructure, health care and education ($4.4b), govt spending of
$4.5b on job credit scheme to help firms stay afloat by giving cash grants to retain jobs
etc.
Eg. reduction in corporate tax rate from 18% to 17%, tax rebates to households.
When govt spending increases, ceteris paribus, AD will rise as govt spending is a
component of AD.
When taxes such as corporate tax was reduced, it provided the incentive for firms to
increase investment spending, which is a component of AD as lowering of corporate tax
increased the after-tax profits of firms. Tax rebates given to households increase their
disposable income which help to encourage households to spend on consumer goods.
Thus with a rise in govt spending and increase in investment and consumption spending,
AD will rise. Higher spending in the economy will lead to a fall in firms stock and this
indicates a need for firms to increase production and thus through the multiplier process,
national income and output will rise a multiple times. Thus, the rise in national income
will reduce the problem of recession caused by the fall in external demand.
Evaluation:
-poor sentiments of consumers and firms=> lower corporate tax rates and tax rebates
may not boost C and I spending.
-job credit scheme aims at retaining jobs during the downturn by reducing firms’ labour
cost. However, this scheme may not be able to keep jobs if firm incur losses and labour
cost is only a small proportion of total cost of production.
-given Singapore’s high dependence on imports and high savings, the multiplier size is
very small. Hence, any increase in AD through expansionary FP has limited impact on
increasing national income and employment.
-given that Singapore is highly dependent on exports, expansionary FP is used only as a
buffer to reduce the severity of the recession but is not a measure to get Singapore out
of the recession.
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- weaker S$ => higher prices of imports and may cause imported inflation thru higher
cost of production given that some of our exports have high import content.
- Govt spending on R&D / innovations => increase our productive capacity in the LR
Evaluation:
- Supply side policies used by the Singapore govt is aimed at improving the long run
capabilities of the economy during the downturn. Through supply-side measures,
our economy’s competitiveness is enhanced so that when the global economy picks
up and the external demand rises, the economy is able to produce high quality
exports to meet the rising demand.
iv) Trade policy to diversify and expand export market, eg. Signing more FTAs,
less reliance on US and EU markets.
Conclusion: Given our high dependence on external demand, the global slowdown has
affected us quite badly. The policies adopted have helped to reduce the negative
impact of the recession on the economy. However, the recovery from the recession has
to depend on the recovery of the global demand and these policies can only help to
reduce the severity of the recession in the short run and also help to improve our
productive capacity in the long run to meet the eventual rise in global demand when the
world economy recovers.
Level 1: 1-8m Answer merely states the impact of a fall in national income and
gives brief mention of some policies to solve the recession
problem without analysis.
Level 2: 9-14m Answer explains how global crisis affected Singapore’s exports
and investment and analyses the subsequent impact on national
income using AD/AS analysis.
Answer analyses at least 2 policies used by the Singapore
government to address the economic slowdown.
Level 3: 15-21m Answer analyses thoroughly how global crisis affected
Singapore’s economy in terms of exports and investment and the
impact on national income with specific reference to Singapore
economy.
Answer analyses and evaluates how demand and supply-side
policy measures were used to address these problems with
specific reference to the Singapore economy.
E1 : 1-2m Able to form some value judgement on the effectiveness of the
policies used to solve the problem.
E2 : 3-4m Able to give judgement on the effectiveness of the policies used
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with justifications. eg. FP is necessary to buffer the negative
impact on the economy but the need for supply-side polices as a
long term measure to boost Singapore’s capacity and efficiency
and to meet the rising demand for our exports when the global
economy recovers eventually.
Question 4
(b) Discuss the view that governments are not able to achieve all the objectives
simultaneously.
[15]
Analysis of Question
Command word: Explain – analyse some important benefits of achieving the 4
macroeconomic objectives.
Key concepts: macroeconomic objectives - price stability, full employment, sustained
economic growth and healthy balance of payment.
a)
Introduction: State the 4 macroeconomic objectives
Development
•Explain the benefits of achieving price stability
Price stability provides a conducive environment which is important for production,
investment and savings to take place. With rising inflation, firms can’t project their future
returns easily and thus, discourage investment which is important for economic growth.
With price stability, production and investments are encouraged and this leads to higher
employment and economic growth.
•Explain the benefits of achieving full employment
Achieving full employment or low unemployment helps to ensure that the economy’s
scarce resources are fully utilized so that the economy is able to achieve full
employment output and higher standards of living for its citizens.
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To achieve a healthy balance of payments means that the country enjoy surplus in its
trading with the rest of the world. This objective is important because a healthy BOP
means that the economy is performing well and accumulating foreign reserves which
can be used to ensure the stability and strength of the country’s exchange rate.
Conclusion: All governments aimed to achieve these macro economic objectives as they
bring about benefits to the economy and the citizens.
Level 1: 1-3m Mere stating of some benefits or problems of not achieving
these macroeconomic objectives
Level 2: 4-7m Able to explain the benefits of achieving at least 2-3
objectives. (2 well-explained benefits ---max 6m)
Level 3: 8-10m Able to explain thoroughly the benefits of all the 4 macro
objectives.
b)
Analysis of Question
Command word: Discuss – analyse and evaluate the ability of governments to achieve
the 4 macroeconomic objectives with reference to both short and long run periods.
Key words/concepts: macroeconomic objectives simultaneously
Introduction
Explain the importance of achieving these 4 objectives but recognize that these
objectives may not be achievable, especially in the short run.
•Explain the possible conflict between price stability and full employment
To achieve price stability, especially demand-pull inflation, government may need to
adopt contractionary demand side policies which cause a contraction in AD and national
income. Therefore, achieving price stability may result in unemployment.
On the other hand, to achieve full employment, govt may have to use expansionary
demand side policies to stimulate AD and output. If AD rises too much, it may cause
inflationary pressure if the economy’s resources are fully utilized.
•Explain the possible conflict between economic growth and healthy BOP
Higher economic growth results in higher purchasing power of the citizens. This may
cause a rise in consumption of both domestic and foreign goods. Also, high economic
growth may also lead to a rise in imports of inputs. Thus, import expenditure may rise
and ceteris paribus, leads to a worsening of the current account of the BOP.
Thus, there are possible conflicts between the various objectives and governments may
not be able to achieve all the four objectives simultaneously in the short run. The reason
why these objectives could be in conflict with each other could be due to the use of only
one policy to address one macro problem. Eg, to achieve price stability, the use of
contractionary FP or MP leads to a contraction in AD and national output and
employment. Therefore, price stability is achieved at the expense of full employment.
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- In the long run, the use of more than one policy, especially with the use of supply side
policies, can help the govt to achieve all the 4 macroeconomic objectives
simultaneously.
- Explain how the use of supply-side policies help to increase productive capacity and
LRAS.
Eg. govt’ subsidies on research and development => improve production processes,
reduce cost of production => improve efficiency and reduce costs of production
Eg. govt’s subsidies on training and education=>improve the skills and quality of labour
force, makes labour market more flexible => reduce structural unemployment and
improve labour productivity.
Eg. govt’s lowering of corporate tax=> incentives for investment=> increase in capital
accumulation, higher level of technology, improve efficiency
-Supply-side policies thus improve productive capacity of the economy causing a
rightward shift in economy’s AS in the LR. As the economy’s ability to produce g/s
increases, so there is less inflationary pressure even with a rise in AD. This helps to
ensure that the country’s exports are price competitive. Also, supply-side policies which
focus on R&D, help to improve the costs of production and improve the quality of
exports. In the long run, this helps to boost export revenue and improve current account
balance. Stable prices in the economy also help to attract more FDI which helps to
improve capital account and boost actual and potential growth of the economy.
•Explain the need to use demand-side policies together with supply-side policies
to achieve the macroeconomic objectives.
- With the use of also demand –side policies such as expansionary FP and MP to boost
AD, the economy will be able to ensure that the objectives of full employment, price
stability and growth can be achieved in the long run. This is because without a rise in
AD, it is unlikely that the higher productive capacity will be put to use. (Use AD/AS
diagram to explain).
Conclusion+ overall evaluation
Conflicts between macro economic objectives may arise in the short run but in the long
run, with the use of more than one policies, both demand-side and supply-side policies,
can help the economy to achieve the four macro objectives simultaneously.
Level 1: 1-3m Answer merely states some conflicts between the various
macro objectives but is lacking in analysis. No attempt to
explain how in the LR these economic objectives may be
attained without conflicts.
Level 2: 4-7m Answer clearly explains how the pursuit of economic
objectives can lead to conflicts in the SR and how the 4
objectives can be achieved in the LR with the use of supply-
side policies.
Level 3: 8-11m Answer analyses clearly the possible conflicts between
objectives in the SR and explains thoroughly how supply-side
policies can help to achieve all the 4 objectives without any
possible conflicts in the LR.
E1:1-2m Some judgement as to whether the 4 macroeconomic
objectives can be achieved without conflicts.
E2:3-4m Some reasoned judgement that both demand and supply-side
policies are needed to achieve the macroeconomic objectives
without conflicts.
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