Suggested Answer Intro To Macro & SOL (Students Upload)

SUGGESTED ANSWERS TO TUTORIAL PACKAGE
CHAPTER 13: INTRODUCTION TO MACROECONOMICS

CHAPTER 14: LIVING STANDARDS & ITS INDICATORS
© Anderson Serangoon Junior College Economics Department B1

Section D: Suggested Answers
Suggested Answers
© Anderson Serangoon Junior College Economics Department D2

Topic: Introduction to Macroeconomic Analysis
SHORT STRUCTURE QUESTIONS
Question 1: Argentina Economic Performance 2019
With a Gross Domestic Product (GDP) of approximately US$450 billion, Argentina is one of
the largest economies in Latin America.
Argentina has vast natural resources in energy and agriculture. Within its 2.8 million square
kilometers of territory, Argentina is endowed with extraordinary fertile lands, gas and lithium
reserves, and has great potential for renewable energy. It is a leading food producer with large-
scale agricultural and livestock industries. In addition, Argentina has significant opportunities
in some manufacturing subsectors, and innovative services in high tech industries.
However, the historical volatility of economic growth and the accumulation of institutional
obstacles have impeded the country’s development. Urban poverty in Argentina remains high
and reaches 35.5% of population, while poverty in children rises to 52.3%.
The economic situation presents a precarious balance. The Argentine peso has lost 68% of
its value since 2018. Annual inflation is over 50% and after a 2.5% fall of GDP in 2018, the
economy contracted an additional 2.2% in 2019.
Source: The World Bank, accessed 29th July 2020
Table 1: Argentina Key Economic Data, 2015-2019

Argentina Key Economic 2015 2016 2017 2018 2019
Data
Real Economic Growth 2.7 -2.1 2.7 -2.5 -2.2
(GDP, annual variation in %)
Unemployment Rate (%) 7.1 8.4 8.4 9.2 9.8
Inflation Rate 26.9 41 24.8 47.6 53.8
(CPI, annual variation in %)
Trade Balance (USD billion) -3.4 2.1 -8.3 -3.7 16.0
Source: Focus Economics, accessed 29th July 2020
(a) With reference to the extract, identify an example of normative and positive statement. [2]
Normative: Argentina has great potential for renewable energy
Positive: With a Gross Domestic Product (GDP) of approximately US$450 billion, Argentina
is one of the largest economies in Latin America.
(b) What is meant by Gross Domestic Product (GDP)? [2]
GDP refers to the total market value of all final goods and services produced within
the geographical boundary of a country within a period of time, regardless of whether
they are produced by nationals or foreigners.

(c) Explain why the government of Argentina should be concerned with its economic
performance in 2019. [3]
Explain the consequence of high inflation:

high inflation  uncertainty about prices and costs  fall in business confidence  fall in
investment  AD fall  fall in actual and potential growth  unable to achieve sustained
economic growth.
Explain the consequence of economic contraction:

fall in PP, fall in material standard of living
Explain the consequence of high unemployment:

resources are not utilised, wastage of resources, as society welfare is not maximised.

QUESTION 2: CIRCULAR FLOW OF INCOME
A. Label each of the following terms in the circular flow of income diagram below:
 Net savings (S)

 Net taxation (T)
 Government expenditure (G)
 Factor payments (national income)
 Expenditure on imports (M)
 Investment (I)
 Expenditure on exports (X)
 Consumption (of domestically produced goods and services) (Cd)
 Factor Payment (Y)
G
X
Y Cd
S
T
M
2. Identify the money flows in the circular flow in figure below:
Factor payments Firms Sales revenue
Factor Market Product Market
Factor income Households Consumption expenditure

QUESTION 3: AD-AS ANALYSIS
Using AD/AS framework, analyse the effects of the following scenarios on the
Singapore economy. For each case, assume that the country is producing near full
employment level (i.e near Yf).
a. In 2019, global oil prices rose by about 20%.
General price level
P2 SRAS2
P1
SRAS1 AD
Y2 Y1 Real GDP
Oil is an important factor of production for many goods and services. Thus when the price of
oil rises, the cost of production in the economy also rises  This will lead to a fall in SRAS,
represented by a shift of SRAS curve to the left from SRAS1 to SRAS2 At P0, level of aggregate
demand exceeds the amount of output produced (AS). There is a shortage of goods and
P2
services in Singapore which cause prices to rises.  GPL rises from P1 to P2 and real national
output falls from Y1 to Y2.

b. Tax incentives and grants on R&D

As part of 2018 budget, Singapore government granted a 250 per cent tax deduction on
qualifying expenditure incurred on eligible R&D activities performed in Singapore and offer
Productivity Solutions Grant (PSG) to make it easier for businesses to adopt off-the-shelf
technologies.
Source: The Business Times, 2018

LRAS1 LRAS2
General Price level
P2
P1
P3
AD2
AD1
Real GDP
Y1 Y2Yf1 Y3 Yf2
Tax allowance & R & D incentive  reduces the cost of investment  profitability of
investment projects rise  increases investment  which causes AD to increase as
AD=C+I+G+(X-M). This is represented by a rightward shift from AD1 to AD2 where
Singapore’s economy is near full employment and there is a lack of spare capacity  A
shortage occurs at the original general price level, causing consumers to bid up prices for the
goods and services. GPL thus rises from P1 to P2.
At the same time, firms increase output which increases national income. This activates the
multiplier process whereby the increase in AD causes a multiplied increase in real national
income/output from Y1 to Y2. However, this effect is dampened due to the increase in GPL.
Long run effect
In the long run, a rise in capital investment can increase the quantity of capital stock in the
economy which causes an increase in the productive capacity of the economy. Thus, the AS
curve shifts rightwards from LRAS1 to LRAS2. Real national output rises further from Y2 to
Y3. The full employment level of output increases from Yf1 to Yf2. The general price level falls
from P2 to P3. The country experiences both actual and potential economic growth.

c. Breakthrough in pharmaceutical research

In 2015, Duke-NUS researchers make dengue breakthrough. Scientists at Duke-NUS
Graduate Medical School have discovered an antibody that can kill all strains of the
dengue serotype DENV-2, one of two common serotypes in Singapore. The researchers
are in the midst of developing a cocktail of drugs that can kill all four dengue serotypes,
having found the DENV-1 antibody in 2012 and the DENV-3 antibody in February this year.
They will next need the antibody for serotype DENV-4.
Source: Today Online, 3rd July 2015

General Price Level LRAS1 LRAS2
P1
P2
AD
YF1 YF2 Real GDP
Advancement in technology  lead to a rise in quantity and quality of factors of production (ie.
Labour, capital)  rise in productive capacity of the economy  LRAS shifts right from LRAS1
to LRAS2  the country’s full employment level of output rises from YF1 to YF2 (which
coincides with the full employment level of output) and GPL falls from P1 to P2.

d. Impact of trade war between US and China on Singapore
The trade war between the United States and China will continue to hammer Singapore’s
economy this year and severely disrupt it into 2020, according to a new report which laid bare
the city state’s exposure to the escalating dispute. Singapore is the second most trade-
dependent nation in the world after Luxembourg and is viewed as an early indicator of ruptures
in the global economy.
88.9 per cent of the economists polled said that “trade tensions escalating” was the biggest
risk facing the Singapore economy, followed by the domestic economic slowdown in China –
Singapore’s largest trading partner – at 50.0 per cent.
Rounding off the top three risks, 38.9 per cent thought “geopolitics” was a potential hazard to
Singapore, emphasising how vulnerable it is to events such as the ongoing anti-government
protests in Hong Kong – the second largest buyer of Singaporean goods. The volatile situation
in the Persian Gulf is also weighing on Singapore, with 5 per cent of its economy dependent
on oil given the city’s role as a refining, re-export, pricing and trading hub.
Source: South China Morning Post, 2019
General Price Level

AS
P1
P2
AD1
AD2
Y2 Y1
Real GDP
Trade war will cause national incomes and purchasing powers of trading partners to fall  fall
in demand for Singapore’s exports  fall in export revenue  fall in net exports  fall in AD
from AD1 to AD2  A surplus occurs at the original general price level, causing producers to
drop prices to clear stocks. Thus GPL falls from P1 to P2. At the same time, firms reduces
output which reduces national income. This activates the multiplier process whereby the fall
in AD causes a multiplied fall in real national income/output to Y2.

e. The Singapore government’s plans to increase its expenditure by 3% of GDP in five

years’ time on provision of healthcare, education and expansion of transport networks
etc.
LRAS1 LRAS2
General Price Level
P2
P1
P3
AD1
AD2
Y1 YY2Y
3 f1 Yf2 Real GDP
P1
Increase in G  causes AD to increase. This is represented by a rightward shift from AD1 to
AD2 where Singapore’s economyYis 1 near full employment and there is a lack of spare capacity
 A shortage occurs at the original general price level, causing consumers to bid up prices
for the goods and services. GPL thus rises from P1 to P2.
Long run effect
Furthermore, a rise in government expenditure can increase the infrastructure or quantity of

capital stock in the economy which causes an increase in the productive capacity of the
economy. Thus, the AS curve shifts rightwards from LRAS1 to LRAS2. Real national output
rises further from Y2 to Y3. The full employment level of output increases from Yf1 to Yf2. The
general price level falls from P2 to P3. The country experiences both actual and potential
economic growth.

f. Australia cuts interest rate for first time in 3 years
Australia’s central bank (government) has cut interest rates to a record low of 1.25 per cent in
a bid to stimulate a slowing economy buffeted by a slump in house prices and a slowdown in
China, the country’s biggest trade partner. It marks the first change to the rate in almost three
years and the Reserve Bank of Australia said it expected the 0.25 per cent cut to help reduce
unemployment and boost subdued inflation.
However, the bank signalled it could ease monetary policy further to support growth and drive
inflation towards its 2-3 per cent target rate. “The Board will continue to monitor developments
in the labour market closely and adjust monetary policy to support sustainable growth in the
economy and the achievement of the inflation target over time,” said Philip Lowe, RBA
governor.
Using AD/AS analysis, explain the likely impact of a cut in interest rates by Australia
central bank on the level of real GDP and general price level in Australia.
A cut in interest rates will result in a fall in cost of borrowing. This will stimulate a rise in
consumption expenditure by household on big-ticket items and a rise in investment
expenditure by firms as there is greater number of projects which are profitable, the expected
rate of return higher than the cost of borrowing. This will lead to a rise in aggregate demand
as AD= C+I+G+(X-M).
Assuming that the economy is operating near full employment level, the rise in AD will lead to
a shortage of goods and services. This will result in rise in prices of goods and services. Firms
will respond by increasing production, resulting in supply bottleneck. Firms have to hire less
efficient factors of production to increase the production, and thus, they experience a rise in
cost of production. They will pass on the rise in cost of production to the households via higher
prices, thus there is a rise in general price level in Australia from P1 to P2. Overall, there is a
smaller multiplied rise in real GDP due to the dampened multiplier process from Y1 to Y2.
General Price Level
In the long run, a rise in investment expenditure can increase quantity of capital stock in the

g. Singapore dollar falls to near 6-month low against Malaysian ringgit
SINGAPORE: The Singapore dollar fell to a near six-month low against the Malaysian ringgit
on Thursday (Feb 14), as the Malaysian currency strengthened amid the country's
announcement that economic growth rose in the fourth quarter. The Singdollar fell to an
intraday low of RM2.9912 before rising back up to RM2.9966, according to Bloomberg data.
This is the lowest since the Singapore dollar touched RM2.9901 on Aug 21 last year. The
Singapore currency fell below the RM3 mark last Friday for the first time since October last
year.
Using AD/AS analysis, explain the likely impact of the change in the value of Singapore
dollar against Malaysian ringgit on the level of general price level in Singapore.
Singapore dollar has depreciated against MYR. The price of the SG export in foreign currency
will fall. Assuming the demand for its exports is price-elastic, this will lead to a more than
proportionate increase in the quantity demanded for exports, ceteris paribus. Thus, there will
be a rise in export revenue.
At the same time, depreciation will increase the price of the imports in SGD. If the demand for
import is price elastic, there will be a more than proportionate fall in the quantity demanded for
exports, ceteris paribus. Thus, there will a fall in import expenditure.
Thus, there will be a rise in net exports and a rise in AD as AD=C+I+G+(X-M).
At the same time, as Singapore lacks natural resources and we import most of our factor of
production, the depreciation of Singapore dollar will result in higher price of imported factor of
production. Thus, there will be a rise in cost of production in the economy and a fall in AS.
These will result in a shortage of goods and services in the economy and a rise in the general
price level from P1 to P2.

h. Rising inflow of FDI into Singapore
In 2018, Multinational companies (MNCs) continued to pump more money into factories and
offices in Singapore last year, even as corporate income tax reforms introduced in the US at
end-2017 led US MNCs to move a big chunk of their accumulated earnings overseas back
home, triggering huge cutbacks on global direct investments.
Foreign direct investments (FDI) flowing into Singapore jumped from US$62 billion in 2017 to
an estimated US$77 billion in 2018, according to the latest FDI figures released by the United
Nations Conference on Trade and Development (UNCTAD).
Source: EDB Singapore

LRAS1 LRAS2
General Price Level
P2
P1
P3
AD1
AD2
Y1 Y2Yf1 Y3 Yf2 Real GDP

P1 in capital spending by Singapore business represents an increase in investment 
A rise
which causes AD to increase. This is represented by a rightward shift from AD1 to AD2 where
Singapore’s economy is near full Y1employment and there is a lack of spare capacity  A
shortage occurs at the original general price level, causing consumers to bid up prices for the
goods and services. GPL thus rises from P1 to P2.
Long run effect
Furthermore, a rise in capital investment can increase the quantity of capital stock in the

Question 4
During late 2016, the Government gave the go-ahead for the construction of the third runway
at Heathrow airport in London which is expected to cost around £17.6 billion. This has the
potential to create many jobs causing a strong multiplier effects in the economy.
a) Assume that the increase in national income as a result of the proposed Heathrow
airport expansion is £29 billion. Using the information above, calculate the value of
the multiplier.
K=29/17.6=1.65
b) Draw an AD/AS diagram to show both the short-run and long-run effects on
macroeconomic equilibrium of investment in a large infrastructure project such as this.

Question 5:
Table 1: GDP Growth Data for Selected Countries

Nominal GDP Real GDP Growth Forecasted GDP
(US$ billions) (%) growth
(%)
2008 2009 2010 2009 2010 2011
United 14296.9 14043.9 14582.4 -2.7 2.9 2.5
States
Japan 4879.9 5033.0 5479.9 -6.3 5.1 -0.6
China 4521.8 4991.3 5878.6 9.2 10.3 9.0
Singapore 189.4 183.3 222.7 -0.8 14.5 4.8
South 931.4 834.1 1014.5 0.3 6.2 4.2
Korea
Source: The World Bank Data (various years)
Table 2: Price and Job Data for Selected Countries (2009)

United Japan China Singapore South
States Korea
Consumer Prices -0.4 -1.4 -0.7 0.6 2.8
(% change)
Unemployment Rate 9.3 5.0 4.3 5.9 3.6
(%)
Source: The World Bank Data (various years)
(a) Explain the difference between nominal Gross Domestic Product and real Gross
Domestic Product. [2]
 Nominal GDP refers to total market value of all final goods and services produced
within the geographical boundary of a country within a period of time (GDP)
measured at current market prices whereas Real GDP refers to GDP at constant
market prices
 Real GDP has been adjusted for inflation and measures GDP using base year
prices (prices in the chosen year of comparison).
(b) To what extent can it be concluded from Tables 1 and 2 that Singapore’s economy
performed worse in 2009 than South Korea’s? [4]
Some of the data to look at in comparing economic performance across countries are:
1) Economic growth data

2) Inflation rate
3) Unemployment rate
In 2009, Singapore was suffering from a recession with real GDP growth rate of -0.8% as
compared to South Korea who still enjoyed slow growth of 0.3%. This meant that while
Singapore’s real output of goods and services fell in 2009  less gds & svcs available for
consumption  mat SOL in Singapore fell. On the other hand, there was still a small increase
in South Korea’s real output  Small increase in amt of gds and svcs available to pple in SK
 mat SOL still can increase.

Singapore’s unemployment rate was also higher in 2009 with 5.9% while South Korea’s was
3.6%. There was a large no of un-utilised labour in Singapore and we are operating relatively
more within the PPC with loss of tax revenue as an opportunity cost and the need to spend
more government expenditure on unemployment benefits.
Singapore inflation rate of 0.6 is lower than South Korea’s 2.8  reflect Singapore’s lower
COL  higher purchasing power and higher mat SOL  Singapore seems to be doing better.
Nevertheless both countries’ inflation rate were still within the healthy range of low inflation
that is below 3%, so savings and investors’ confidence might still be protected.
Judging from the economic growth and unemployment data, Singapore’s economy seem to
have performed worse than South Korea in 2009.
Limitations of data:
However, there is also a need to look at other aspects of the country in order to have a better
understanding and overview of the country’s performance. Information such as overall balance
of trade and more specific indicators like labour productivity and growth of manufacturing
output may be needed to make a more valid conclusion about both Singapore and South
Korea’s economic performance.

Question 6: Economic problems in Bulgaria
Bulgaria is the poorest of the 27 countries (as of May 2013) in the European Union (EU). It
joined the EU in January 2007. Average wages are only US$4.50 an hour and average
monthly salaries are only US$465. The rate of unemployment in Bulgaria in 2012 was
estimated at 12%, compared to an EU average of 9.4%. This level of unemployment, however,
was much less than that in some EU countries, such as Greece, where the rate of
unemployment was twice as high.
The population of Bulgaria is 7.5 million and yet over a million Bulgarians have left the country
in recent years to work abroad, especially in Spain and Greece. The value of the money they
have sent back home, known as migrant remittances, has risen from US$900 million in 2008
to US$990 million in 2012. Much of the work that these people do in Spain and Greece is
seasonal and so there have been particular problems of seasonal unemployment, with some
of the migrants losing their jobs and having to return home.
Within Bulgaria, a lot of workers have lost their jobs in the construction industry. It had been
planned that a large number of hotels and holiday flats would be built along Bulgaria’s Black
Sea coast. Since 2008, there has been a dramatic fall in the demand for these properties and
many construction firms have gone out of business, having failed to obtain sufficient funds
from financial institutions.
The Gross Domestic Product (GDP) of Bulgaria has only been growing by 1.7% per year in
recent years. In 2012 the GDP was US$48.0 billion. One of the problems in measuring GDP
in Bulgaria is that it has been estimated that as much as 30% of the economy goes unrecorded.
There is a great deal of activity in what has been termed the hidden or informal economy. Not
all income earned is declared for tax purposes, there is some smuggling (illegal importing) and
much of agricultural output is subsistence farming.
It is noticeable that the death rate in Bulgaria is considerably higher than the birth rate (see
Table 2 for details). A survey of Bulgarians found that about 70% of them expected the
economic situation in the country to worsen in the next 12 months, not something that would
be likely to bring about an increase in the birth rate. This has meant that Bulgaria now has the
second most rapidly declining population in the world, as shown in Table 1.

Table 2: A comparison of Bulgaria and the EU average in 2012
Indicators of comparative Bulgaria EU average

living standards
Birth Rate 9.9 10.1
Death Rate 14.6 9.9
Health spending (% of GDP) 7.4 10.7
Education spending (% of GDP) 3.5 4.9
GDP per capita (US$) 6420 38080
Edited from Cambridge IGCSE Economics 0455, 2014 Paper
Questions
(a) Using information from the extract, calculate what would have been the estimated size of
the informal economy in Bulgaria in 2012 in US$. [1]
(b) With reference to the extract, explain why such a large percentage of the Bulgarian Gross
Domestic Product goes unrecorded. [2]

(c) With the aid of a diagram, explain the impact of declining population on Bulgaria’s economy.
General Price Level [6]
AS2 AS1
P1
P2
AD1
AD2
Real GDP
Y2 Yf2 Y1 Yf1
Declining population: C likely to fall AD falls to AD2  Surplus of goods and services -->
accumulation of stocks  firms reduce production  trigger reverse K process  multiplied
fall in real GDP and fall in derived demand for workers, unemployment rise.
No. of workers fall productive capacity falls  LRAS likely to fall to AS2  potential growth
fall from Yf1 to Yf2.
(d) With reference to Table 2, explain any two indicators that you will use to compare living
standards in different countries. [6]
GDP per capita (US$) Compare the level of material SOL  higher GDP per capita  higher
purchasing power  able to consume more goods and services  material SOL is higher.
Death Rate high death rate could be an indicator for quality of healthcare  if healthcare is
poor, the residents will experience lower SOL as they suffer greater physical and emotional
distress  non-material SOL is lower.

Section B: Tutorial Package
SECTION B: CASE STUDY QUESTIONS
*Question 1: 2007 GCE A Level Examination CSQ 1
OECD report on China, Brazil and the Russian Federation, 2005
Extract 1: China
Asian economic growth stabilised in 2004 with the slight increase in China’s growth being offset
elsewhere in the area. The increase in China’s growth came despite tighter fiscal policy and
strengthened controls over investment. The latter were only partially effective as profitability continued
to drive investment expenditures in the ever more important private sector. Looking at the demand
side of growth, investment has long been a major driver. Even though per capita capital stock in China
is still lower than in more advanced economies, a gradual rebalancing from investment to
consumption is needed as it spends on economic investment, leaving less for consumption. The
strength of exports and the economy as a whole were also related to the depreciation of the exchange
rate. In the future, domestic demand may slacken. However, rapid export growth will limit this
slowdown and produce a marked increase in the current account surplus.
Extract 2: Brazil
Economic growth in Brazil was above 5% in 2004, the strongest in almost 20 years. Growth continued
to be driven by strong consumer demand, pushed by the recovery in employment and wages, and in
investment. Export growth also remained robust, owing to strong demand from OECD markets, as
well as from China. Imports surged on the back of robust private consumption and investment. The
Brazilian exchange rate appreciated over the year. Growth was set to continue in 2005-06, but at a
slower pace than in 2004.
Extract 3: Russian Federation
In 2005 Russia and other commodity exporters in the region are expected to continue to benefit from
very high prices for hydrocarbons and metals. However, Russian economic activity should slow, as
the growth rates of both investment and export volumes have fallen and are unlikely to pick up again
in the absence of steps to restore shaken business confidence. Nevertheless, Russia’s expansion
was set to continue, as unexpected increases in oil revenues are increasingly used to finance
expansionary fiscal policy by increasing government expenditure on infrastructure and to fuel
household consumption.

Table 1: Macroeconomic Indicators: China
2003 2004 2005 2006

Annual rate of growth in real 9.5 9.7 9.0 9.2
GDP
Rate of inflation 1.2 3.9 4.0 4.2
Government budget balance -1.9 -0.9 -0.4 -0.2
Current account balance (US$ 45.9 68.7 100.00 101.0
Billion)
Current account balance (% of 3.1 4.0 5.2 4.6
GDP)
Table 2: Macroeconomic Indicators: Brazil
2003 2004 2005 2006

Annual rate of growth in real GDP 0.5 5.2 3.7 3.5
Government budget balance -5.1 -2.7 -3.8 -2.8
Billion)
GDP)
Table 3: Macroeconomic Indicators: Russia
2003 2004 2005 2006

Annual rate of growth in real GDP 7.3 7.1 6.0 6.0
Government budget balance 1.2 4.5 2.0 1.5
Billion)
GDP)
Source: Organisation for Economic Co-operation and Development (OECD) Outlook Vol 77

Questions
(a) (i) Describe the trend in the government budget balance in China between 2003
and 2006. [2]
(ii) Compare this trend with the changes in the Russian government’s budget balance in
the same period. [2]
(b) (i) What is the difference between real GDP growth and nominal GDP growth?
[1]
(ii) Identify the economy which is projected to have the highest growth in nominal GDP in
2006. [1]
(c) With reference to the data where appropriate, explain the factors that might cause the
projected changes in Brazil’s current account balance shown in Table 2. [6]
(d) Discuss whether the data provided are sufficient to assess changes in the standard of living
in these economies over the period. [8]
(e) Discuss and compare the likely impact of an unexpected decline in world economic activity on
any two of these economies. [10]
[Total: 30]

Suggested Answers
*(a) (i) Describe the trend in the government budget balance in China between 2003
and 2006. [2]
Budget deficit became smaller between 2003 and 2006.
(ii) Compare this trend with the changes in the Russian government’s budget balance in
the same period. [2]
In contrast to China’s shrinking budget deficit, the Russian government had a

decreasing budget surplus.
*(b) (i) What is the difference between real GDP growth and nominal GDP growth?
[1]
Real GDP growth is the rate of increase in all final goods and services produced within
the geographical boundaries of a country over a period of time regardless whether they
are produced by nationals or foreigners, after taking into account inflation. In contrast,
nominal GDP growth does not take into account inflation.
(ii) Identify the economy which is projected to have the highest growth in nominal GDP in
2006. [1]
Russia = 6+12% = 18%
(whereas China= 9.2+4.213.4% and Brazil =3.5+5%=8.5%)

(c) With reference to the data where appropriate, explain the factors that might cause the
projected changes in Brazil’s current account balance shown in Table 2. [6]
Projected fall in surplus on current balance.
Explain any 2 factors below:
1. Continued economic growth in Brazil as seen in Table 2 whereby growth rates are positive
of around 3.5 – 3.7%   wages, employment, incomes   demand for imports of goods
and services of consumer goods + investment goods   Assuming demand for imports
is income elastic as imports are likely to be higher value added goods which Brazil may
lack as a developing country  more than proportionate  demand for M   import
expenditure, assuming TRx remains unchanged   surplus in current balance.
Alternative explanation
Continued economic growth in Brazil as seen in Table 2 whereby growth rates are positive
of around 3.5 – 3.7%   wages, employment, incomes   demand for imports of goods
and services of consumer goods + investment goods   Assuming MPM is high for Brazil
as incomes  more than proportionate  demand for M   import expenditure, assuming
TRx remains unchanged   surplus in current balance.
2. Appreciation of Brazilian exchange rate
a.  Px in foreign currency  assuming demand for X is price elastic  more than

proportionate  quantity demanded of X   X earnings
b.  Pm in domestic currency  assuming demand for M is price elastic  more than
proportionate  quantity demanded for M   M expenditure
 X earnings &  M expenditure   surplus in current balance.
3. Higher inflation rate relative to other countries such as China
a. With higher domestic inflation for Brazil relative to other countries like China  
Px in foreign currency  assuming demand for X is price elastic  more than
proportionate  quantity demanded of X   X earnings
b. With higher domestic inflation for Brazil relative to other countries like China 
imports in China will be relatively cheaper compared to Brazil  substitution effect
from import-substitutes of Brazil towards China’s imports   DDm for Brazil 
M expenditure for Brazil
 X earnings &  M expenditure   surplus in current balance.

*(d) Discuss whether the data provided are sufficient to assess changes in the standard of living
in these economies over the period. [8]
 Definition: Standard of living is defined as the overall quality of life of the average citizen living in
that economy. Standard of living encompasses both the material standard of living which
measures the amount of consumption goods that the average citizen in the economy is able to
enjoy and non-material standard of living which measures the quality of life enjoyed by the average
citizen.
 Direction: Whether the data provided are sufficient to assess changes in the standard of living in
the three economies depend on how useful they are in measuring both the material and non-
material standard of living.
P1: The data provided in Tables 1-3 show an increase in real GDP for all three economies,
which indicates an increase in material standard of living (SOL) in all three economies.
E/E: Material standard of living can be measured by real GDP. Increase in real GDP implies a higher
SOL because it means the residents are now able to purchase and enjoy more consumption of
goods and services. All economies showed rise in real GDP (Tables 1 – 3). The extracts also
mention a rise in domestic consumption.
L: Hence, it seems from the data that material standard of living has increased in all three economies.
P2: Despite this, the data is insufficient to assess material standard of living as there are
limitations in the data.
E/E: One such limitation is the lack of information on population growth. Material standard of living is
most accurately measured by real GDP per capita. Even if real GDP were to increase, if population
growth rate exceeds that of real GDP, then real GDP per capita would actually decrease indicating
that the material standard of living is lower.
E/E: The data also does not include changes in income distribution. Increases in real GDP could be
due to increase in income of the rich only. The average citizen may not necessarily be better off
even though real GDP increases. This is because the rise in real incomes is only experienced by
the rich (e.g. top 5% of all households) while the poor (e.g. bottom 10% of all households)
experience a fall in real incomes. Information on the Gini coefficient in each economy could then
be provided to complement income statistics. The Gini coefficient measures the income inequality
in an economy where the coefficient varies between 0, which reflects complete equality, and 1,
which indicates complete inequality (one person has all the income while all others have none).
L: Thus, additional information on the population growth rate and income distribution would be
needed to make any conclusions on the material standard of living in these economies.
P3: In addition, the data lacks any information on the non-material standard of living.
E/E: For example, economic growth could bring about an increase in pollution, due to increased
production in the economy. This would lower the quality of air and hence inflicts a negative third-
party effect on the health of the population in general. This can be observed in Beijing which is
currently struggling with air pollution. Hence, information on the quality of air such as the Pollution
Standard Index (PSI) would help us to conclude whether the non-material standard of living in
these economies is improving.

E/E: Similarly, further indicators on the quality of life such as the amount of leisure hours could be
provided to ascertain whether the non-material standard of living in these economies has
increased. Real GDP could have increased due to increase in work hours, rather than a rise in
labour productivity which is defined as output per man-hour, which would reduce the quality time
with the family and also rise in the level of stress.
L: Thus, improvements in material standard of living may not necessarily be accompanied by

improvements in non-material standard of living. Information on non-material standard of living or
quality of life is necessary in order to make a reasoned and holistic conclusion on standard of
living.
Summary: The data only provide one important aspect of SOL which is real GDP. However, the data
is not sufficient as SOL covers both material and non-material aspects of well-being. Personal
opinion: Hence, there is a need for another indicator such as the Human Development Index (HDI).
The index is a composite one, taking into account real GNI per head (PPP$), life expectancy at birth
and educational attainment as measured by adult literacy and combined primary, secondary and
tertiary enrolment ratio, which can be used to assess both non-material and material standard of
living. If any of the three economies experiences a rise in its HDI value over the years, it can be
reasonably concluded that there is an improvement in the country’s SOL, rather than just basing the
assessment on changes in real GDP per se.
Level Descriptors
L3 Candidate is able to explain clearly the value of the data provided and evaluate the
limitations of the data. The candidate also explains how and why the existing data
could be developed and extended to become a more effective measure of the
standard of living.
L2 Candidate is able to explain how the existing data measures standard of living and
is able to explain some limitations of the data. Explanation of the limitations are
explained briefly but not developed.
L1 Smattering of points. Candidate is only able to explain how the existing data
measures standard of living and/or merely referred to the different indicators
without explanation.

*(e) Discuss and compare the likely impact of an unexpected decline in world economic activity on
any two of these economies. [10]
Introduction:
An unexpected decline in world economic activity would lead to an adverse impact on the economies
mentioned in the data. The extent of the negative impact depends on the dependence of that economy
on external trade, existing economic conditions in that economy and other factors. This essay will
compare Russia and China’s expected economic performance.
Body:
P1: In theory a decline in world-wide economic growth would lead to a fall in both China’s and
Russia’s GDP. [Analysis of impact of decline in world economic activity]
E/E: A decline in world economic activity would lead a fall in major economies’ national incomes. This
in turn will lead to a fall in demand for imports from other countries and hence a consequential fall
in demand for both China’s and Russia’s exports. This would lead to fall in their export earnings
and assuming import expenditure remains constant, a fall in their net exports. When (X-M) falls,
AD falls as AD= C+I+G+(X-M).
General Price Level
AS
AD2 AD1
AD3
P1
Y2 Y1 Real GDP
0
A fall in AD is likely to decrease the level of real GDP with no change in the general price level when
the AS curve is perfectly price elastic and the economy is operating at excess capacity or when it has
not reached full employment.
Assume that the economy is initially in equilibrium where AD=AS on the horizontal portion of the AS
curve as shown above. In such a situation, the fall in AD will eventually result in a multiple decrease
in national income (real GDP) while leaving the general price level unchanged.
L: Both China and Russia should experience a fall in national income given an unexpected decline in
world economic performance.

Body (evaluation):
P2: The extent of the fall in GDP would also depend in part on the country’s dependence on
international trade.
E/E: From data, it seems that Russia may be more severely affected than China because Russia
seems to be more exposed to international trade as seen in higher current balance as percentage
of its GDP. This means that any fall in (X-M) would cause a greater fall in AD as compared to
China.
L: As Russia is more open to trade than China, it would be more badly affected by an unexpected
decline in world economic activity.
P3: The prevailing economic conditions in different countries would also affect how Russia
and China would be impacted by an unexpected decline in world economic activity.
E/E: Russian economic growth seems to depend increasingly on oil revenues to finance its fiscal
policy. With a slowing down of world economic activity, the demand for oil is likely to fall as the
demand for oil is a derived demand. Hence this means less revenue to finance government
spending. In addition, there is fall in growth of investment and lack of business confidence. Hence,
economic growth would be more adversely affected. In China however, there is greater business
confidence and also depreciation of its exchange rate to ensure its export price competitiveness.
L: Hence, the decline in world economic activity would not have as great an adverse impact on China
as compared to Russia.
P: The size of the multiplier in both countries would also determine the extent of the impact on both
countries.
E/E: Given a decrease in AD, economies with a larger multiplier would experience a larger decrease
in national income. Large multiplier may be due to low marginal propensity to save, tax and/or
import. There could a higher marginal propensity to save in China than in Russia due to the Asian
culture of thriftiness in which households tend to save a bigger proportion of income earned for
precautionary purpose. Ceteris paribus, there would be a smaller multiplier in China.
L: Hence, for any decline in world activity, there would a smaller multiple fall in national income in
China. In this case, China would be less affected than Russia.
Conclusion:
From the data provided in the extracts and tables it seems to suggest that Russia’s relatively more
open nature to trade flows and larger multiplier would cause Russia to experience a greater decrease
in national income given an unexpected decline in world economic activity. However, this does not
take into account the ability of the government to respond and put in place policies to counter the fall
in aggregate demand. For example, Russia has been running a budget balance surplus from 2003-
2006. This would allow the government to use the accumulated surplus to fund an expansionary fiscal
policy and counter any fall in external demand.
If Brazil is chosen:
Brazil: least open economy – hence may not be very much affected by decline in world economic
activity + robust private investment. But its exchange rate appreciated. So this may add on to the fall
in national income.

Marking scheme:
Level Descriptors
L3 Candidate is able to explain clearly why one economy may be more adversely
affected than another economy by explaining that the extent of the adverse
effect depends on the strength of a range of factors that may or may not have
been suggested in the data – for example, the economy’s openness to trade.
The candidate is able to explain clearly using these factors why one economy
may be more adversely affected than the other.
L2 Candidate is able to explain how an unexpected decline in world economic
activity would impact both economies and is able to provide some economic
explanation as to which economy is likely to perform better.
L1 Smattering of points. Candidate is able to explain how an unexpected decline
in world economic activity would impact both economies but is unable to
accurately compare the impact.

Essay (N2011)
(a) Explain the process whereby an increase in government expenditure can lead to a bigger
change in national income. [10]
Introduction
National income measures the value of final goods and services produced in the country in a
year. Government expenditure as a component of aggregate expenditure is the spending by
the government on current goods and services and excludes transfer payment. An increase
in government expenditure on domestically produced goods and services will result in a
bigger increase in national income as a result of the interaction between income and output
flow in the circular flow of income. The expenditure of firms, government and foreign sector
becomes the income of the households. The higher income results in induced consumption
and that leads once again to an increase in expenditure, output and income.
Body
An increase in government expenditure (e.g. as an expansionary fiscal stance during a

recession) will increase the aggregate demand in the economy. The increase in aggregate
demand is illustrated by an rightward shift of the AD function from AD 0 to AD1 as shown in
figure below. An increase in AD is likely to increase the level of real GDP with no change in
the general price level when the AS curve is perfectly price elastic.
General price level AS
AD”
’
AD1 AD
AD2
$100m
P1
Y1 Y2 Real GDP
Rise in aggregate demand
Assuming that the economy is initially in equilibrium where AD=AS on the horizontal portion
of the AS curve. In such a situation, the rise in AD will eventually result in a multiple increase
in national income (real GDP) while leaving the general price level unchanged. The full
multiplier effect of a change in AD is explained below.
Assume the rise in government expenditure is by $100m on infrastructure such as a new

airport. The immediate effect of this rise in government spending is an equivalent increase in
national income and real GDP as more people are hired to build the airport. However, the
rise in national income does not stop there. Recipients of the $100m income will now have
more to spend on goods and services such as food, clothes and entertainment. Assuming
that they spend 60 cents out of every additional dollar of income earned i.e. the marginal
propensity to consume (MPC) is 0.6, they will increase their spending (C) on domestically
produced goods and services by $60m. The remaining $40m of additional income is
withdrawn from the circular flow of income(economy) in the form of savings, taxes paid to the
government and expenditure on imports of foreign goods.

The rise in induced consumption on domestically produced goods of $60m creates new
incomes for another group of people who supply the consumer goods. Assuming this group
of people also has an MPC = 0.6, there will be another round of increase in induced
consumption by $36m (= 0.6 x $60m). The remaining additional income earned ($24m) goes
to savings, taxes and expenditure on imports.
The process of increases in national income and induced consumption continues, with the
magnitude of each change getting smaller. At each round, there is also a rise in withdrawals.
Eventually the multiplier process is completed when the total rise in withdrawal equals to the
initial rise in autonomous expenditure) (in this case, investment), i.e. $100m.
In the above illustration, an initial increase in investment expenditure of $100m will eventually
lead to an increase in equilibrium level of national income that is greater than $100m. The
total rise in national income depends on the value of the multiplier (k). The larger is the value
of the multiplier, the larger is the rise in national income.
The multiplier process is illustrated in Table 1 where there is an initial change in autonomous
expenditure. In the example, we assume MPC=0.6, hence MPW=0.4. So the value of the
multiplier (k) = 2.5. This means that the initial rise in autonomous expenditure of $100m will
cause national income to rise by $250m.
In our example above, since MPC=0.6, then MPW=0.4. So the value of the multiplier (k) =
2.5. This means that the initial rise in autonomous expenditure of $100m will result in national
income to rise by $250m as shown in the table below.
Round Change in Change in Change in Induced Change in Withdrawal

Investment National Income Consumption ($m) ($m)
($m) ($m) = MPC x ∆Y = MPW x ∆Y
(∆Y)
1 100 100 60 40
2 No change 60 36 24
3 No change 36
...
...
...
...
Total 250 150 100
The multiplier effect of a rise in autonomous expenditure is illustrated on the diagram above.
An initial rise in autonomous expenditure by $100m shifts the AD curve from AD1 to AD’. Firms
expand output and national income rises. The rise in incomes induces a rise in consumption
which shifts AD curve further and further to the right (dotted AD curves) but by smaller amounts.
New equilibrium level of national income and real GDP is higher at Y2.
Conclusion
Hence the value of the multiplier will determine the total change in national income when
government expenditure changes. If the country has a large MPW such as Singapore, the
value of the multiplier is small. Hence, any change in injections will lead to a smaller change
in national income and that has implications on the effectiveness of demand management
policies in the country.

Q2. 2014 GCE ‘A’ Level H2 Examination Q5
In 2011 Singapore’s GDP at 2005 prices grew by 4.9%, the total population grew by 2.5%,
inflation (as measured by the consumer price index) was 5.2% and overall unemployment
stood at 1.9%.
Source: http://www.singstat.gov.sg/stats/latestdtata.html, accessed 30 January 2013
Discuss the limitations of these statistics in both assessing the change in the standard of
living in the Singapore economy in 2011 and comparing it with that of other economies.
Intro
Definition of key terms: The standard of living refers to the level of material and non-material
well-being of an individual or household. The material well-being is measured by the quantities
of goods and services consumed while the non-material well-being is measured by other
factors affecting quality of life such as number of leisure hours and pollution levels.
Direction: Statistics such as real GDP growth, inflation and unemployment rate are used to
assess the economic performance of a country. These statistics are also to some extent
together to assess the change in standard of living of a country as well as a basis of
comparison with that of other economies.
Body
P1 Thesis: GDP at 2005 prices indicates the Real GDP which can be used to assess the
material SOL of Singapore.
GDP is a common yardstick used to assess the well-being or standard of living of the people
in a country. The material well-being is measured by the quantities of goods and services
consumed. The real GDP figure is commonly used as an indicator of the level of material well-
being. A 4.9% growth in GDP at 2005 prices means that there is a 4.9% increase in the value
of real output (qty or volume of goods) by the country after taking inflation into consideration.
With the rise in real incomes, people are better off because more goods and services have
been produced and made available for consumption. More wants are satisfied thus increasing
the material standard of living of its people.
P2: (Anti-Thesis) GDP data might not be a good measure of material SOL in Singapore
over time.
Despite being useful in assessing the level of SOL, there are some limitations in using the
GDP data to measure its change over time.
i. Changes in Population
An increase in real GDP may not necessarily mean that the average citizen is able to enjoy
4.9% more goods and services. This depends on the rate of population increase as it is
important to see how the total output is shared among the people. As population growth is 2.5%
which is lower than the growth of real GDP of 4.9%, this means that real GDP per capita has
increased by 2.4%. On average, each person has more goods to consume now. In contrast,
if population growth is 5%, then the real per capita income would have fallen. It is necessary
to take into account population changes especially when we are comparing SOL between
countries that have high population growth rates. Thus a more relevant measure of living
standards would be real GDP growth per capita.

ii. Changes in the Distribution of Real GDP
Real GDP per capita is a statistical mean (average) and it does not reflect the income
distribution among the people in the country. An increase in real GDP per capita does not
mean that all individuals benefit equally from economic growth as there is bound to be
inequalities in the distribution of income. If the distribution of income become more unequal
as the country enjoys economic growth such that the rich become richer while the majority of
the poor remains poor, then many of the people did not experienced an improvement in
standard of living despite an increase in real GDP/capita. Thus to make meaningful
comparisons of standards of living over a period of time, we have to make use of
supplementary indicators such as the Gini coefficient.
For example, Singapore’s income gap, as measured by the Gini coefficient has increased. In
fact, its income gap is one of the widest among developed countries at 0.478. Therefore, there
is a need to take this into consideration when assessing the change in material SOL in
Singapore as well as using real GDP per capita to compare SOL between countries.
P3: (Anti-Thesis) GDP data does not measure the non-material SOL in Singapore.
i. Quality of Life
The growth in real GDP per capita figure represents the growth in value of output of final goods
and services produced in a year. It does not reflect changes in the quality of goods and
services nor the non-material standard of living. While output in quantitative terms has
improved over the years, the quality of life may have suffered due to the faster pace of life,
increased traffic congestion and environmental degradation. These negative externalities, i.e.
external costs, are largely ignored in national income accounting even though they diminish
the quality of life eg increase health problems. Despite the rise in real GDP per capita,
Singaporeans do face the problems of traffic congestions, overcrowded public transports,
frequent breakdowns in train services and the occasional haze which affected air quality.
These reduce the quality of life and thus affect the non-material SOL of Singaporeans.
ii. The ‘Effort’ Element

An increase in the real GDP may occur because the labour force is working longer hours or
putting in more effort per unit of time. If it is true, fewer hours are available for leisure, for
families and friends. Hence, the non-material standard of living may not have improved. It
might even lead to higher level of stress and medical problems and adverse social effects like
neglected children and juvenile delinquency.
A U.S. Bureau of Labour Statistics report indicates that of the 20 countries covered, average
annual hours worked were highest in Singapore at well over 2000 hours, in 2011. In contrast,
Singapore was ranked 20th in terms of GDP per hour worked (an indicator of a country’s
productivity). The longer hours spent at work means that fewer hours are available for leisure,
for family and friends. Hence, the non-material standard of living in Singapore, or the quality
of life may suffer as people experience a higher level of stress.
Evaluation
Hence, Real GDP per capita growth must be supplemented by statistics like demographic
changes such as infant mortality rate, life expectancy etc and social indicators such as literacy
rate and crime rate. This is known as the Physical Quality of Life index (PQLI) pioneered in
1979 by the Washington-based Overseas Development Council.
Another more comprehensive and holistic indicator of measuring SOL is the Human
Development Index (HDI) provides a composite measure of three dimensions of human
development: living a long and healthy life (measured by life expectancy), being educated

(measured by adult literacy and gross enrolment in education) and having a decent standard
of living (measured by purchasing power parity, PPP, income).
P4: Anti-Thesis The use of GDP data and inflation rate as measure to compare SOL of
Singapore with other countries might be limited.
Differences in Cost of Living

To facilitate comparison between countries, the GDP estimates of countries need to be
converted into a universally accepted currency (e.g. US dollars) at the current market
exchange rate. The problem arises if the market exchange rates differ from its purchasing
power parity which measures what it will buy in terms of a standard basket of products in
different countries. For example, if a basket of goods costs S$100 and RM250 in Singapore
and Malaysia respectively, then the purchasing power parity between the 2 currencies is S$1:
RM2.50. Thus, although a country’s GDP per capita may be 10 times higher than another’s,
its standard of living may not be 10 times higher because of its higher cost of living.
Fluctuations in the exchange rates can also make comparisons meaningless. For example, a
rise in the value of the S$ against the US$ will suddenly increase its GDP in terms of US
dollars. Hence the Singapore might appear to be enjoying a higher income when, in reality,
there is no change in real output and standard of living. So by using PPP, this kind of
fluctuation is avoided as the inflation rates between countries are not as volatile as the market
exchange rate. (the exchange rate based on PPP is more stable)
Thus, comparison of living standards can result in an inaccurate assessment if one country
experiences wider exchange rate fluctuations than the other country.
P5: Unemployment data could be useful

Unemployment of labour occurs when people who are willing and able to work and are actively
seeking a job but are unable to find jobs. Without jobs, an individual will not be able to earn
an income. High unemployment rate reduces the material standard of living.
In addition, high unemployment is linked to many social problems such as crime, and other
aspects associated with social dislocation (for example increased divorce rates, worsening
health and lower life expectancy). This resulted in a fall in non-material standard of living.
The preamble stated that the rate of unemployment stood unchanged at 1.9% indicating that
1.9% of the labour force is unemployed. This figure is considered low and positively impact
the SOL as compared to Greece which suffers from an unemployment rate of 25% in 2014 as
more employment means more income and so higher SOL.
P6 Anti-Thesis: Unemployment data might not be a good measure of material SOL in

Singapore over time.
Unemployment rate excludes workers who are not actively seeking for a job and therefore
they are not part of the labour force. So if there are many unemployed workers who are
discouraged from looking for a job due to a prolonged recession, the unemployment rate falls
because they are not considered as unemployed and they are also not considered as part of
the labour force. The unemployment rate also does not separate those who have full time jobs
and part time jobs. So even though the unemployment rate is low it may hide the fact that
many could be just part timers and therefore, SOL could be lower than what the data show as
part timer normally earns less. In the case of Singapore, we have many foreign workers. A
more accurate data is the unemployment rate of Singapore workers rather than all workers.
There are many other limitations of the unemployment rate. As such it is necessary to have
other information to supplement data on unemployment to get a more accurate picture of SOL.

Evaluation: Recommendation
The data only provide one important aspect of SOL which is real GDP. However, the data is
not sufficient as SOL covers both material and non-material aspects of well-being. Personal
opinion: Hence, there is a need for another indicator such as the Human Development Index
(HDI). The index is a composite one, taking into account real GNI per head (PPP$), life
expectancy at birth and educational attainment as measured by adult literacy and combined
primary, secondary and tertiary enrolment ratio, which can be used to assess the changes in
both non-material and material standard of living in Singapore and for comparison across
countries.
Conclusion /Evaluation
Summary: Data such as GDP growth, inflation rate and unemployment are useful in assessing
the level of material SOL over time and space to a certain extent. One has to also take into
account the non-material aspects of SOL. Furthermore there might be issues regarding the
accuracy and reliability of the data which hinder a fair assessment of changes in SOL.
For most countries, it is difficult to obtain complete information for a reasonably accurate
calculation of these data. However, Singapore which is a developed country has a high level
of statistical sophistication in sampling techniques. The increased accessibility to required
data coupled with the high level and rate of literacy have allowed for a more accurate and
adequate collection of data to measure the change in material SOL of Singapore.
Degree of accuracy is greater for developed economies. As such comparing SOL between
developed countries is more reliable than comparing SOL between developed and developing
economies.

Suggested Answer Intro To Macro & SOL (Students Upload)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Suggested Answer Intro To Macro & SOL (Students Upload)

Uploaded by

Copyright:

Available Formats

SUGGESTED ANSWERS TO TUTORIAL PACKAGE

CHAPTER 13: INTRODUCTION TO MACROECONOMICS

© Anderson Serangoon Junior College Economics Department B1

© Anderson Serangoon Junior College Economics Department D2

Topic: Introduction to Macroeconomic Analysis

SHORT STRUCTURE QUESTIONS

Question 1: Argentina Economic Performance 2019

Source: The World Bank, accessed 29th July 2020

Table 1: Argentina Key Economic Data, 2015-2019

Normative: Argentina has great potential for renewable energy

(b) What is meant by Gross Domestic Product (GDP)? [2]

© Anderson Serangoon Junior College Economics Department D3

Explain the consequence of high inflation:

Explain the consequence of economic contraction:

Explain the consequence of high unemployment:

© Anderson Serangoon Junior College Economics Department D4

QUESTION 2: CIRCULAR FLOW OF INCOME

 Net savings (S)

2. Identify the money flows in the circular flow in figure below:

Factor payments Firms Sales revenue

Factor Market Product Market

Factor income Households Consumption expenditure

© Anderson Serangoon Junior College Economics Department D5

QUESTION 3: AD-AS ANALYSIS

General price level

© Anderson Serangoon Junior College Economics Department D6

b. Tax incentives and grants on R&D

Source: The Business Times, 2018

Long run effect

© Anderson Serangoon Junior College Economics Department D7

c. Breakthrough in pharmaceutical research

Source: Today Online, 3rd July 2015

YF1 YF2 Real GDP

© Anderson Serangoon Junior College Economics Department D8

d. Impact of trade war between US and China on Singapore

Source: South China Morning Post, 2019

General Price Level

© Anderson Serangoon Junior College Economics Department D9

e. The Singapore government’s plans to increase its expenditure by 3% of GDP in five

Long run effect

Furthermore, a rise in government expenditure can increase the infrastructure or quantity of

© Anderson Serangoon Junior College Economics Department D10

f. Australia cuts interest rate for first time in 3 years

General Price Level

© Anderson Serangoon Junior College Economics Department D11

g. Singapore dollar falls to near 6-month low against Malaysian ringgit

Thus, there will be a rise in net exports and a rise in AD as AD=C+I+G+(X-M).

© Anderson Serangoon Junior College Economics Department D12

h. Rising inflow of FDI into Singapore

Source: EDB Singapore

Y1 Y2Yf1 Y3 Yf2 Real GDP

Long run effect

© Anderson Serangoon Junior College Economics Department D13

© Anderson Serangoon Junior College Economics Department D14

Table 1: GDP Growth Data for Selected Countries

Table 2: Price and Job Data for Selected Countries (2009)

1) Economic growth data

© Anderson Serangoon Junior College Economics Department D15

© Anderson Serangoon Junior College Economics Department D16

Question 6: Economic problems in Bulgaria

© Anderson Serangoon Junior College Economics Department D17

Table 2: A comparison of Bulgaria and the EU average in 2012

Indicators of comparative Bulgaria EU average