(2020) A Level H1 Econs Paper 1 CSQ Q2

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2020 A Level H1 Economics 8823 CSQ2 Suggested Answers Outline

a.         GDP

1.     Post 2008, Italy suffered a fall in GDP from 2008 to 2015 before experiencing positive economic growth from 2015 to 2017

2.     In contrast, Singapore saw consistent positive GDP growth from 2008 to 2017

            Inflation

1.     Both countries saw generally low inflation from 2013 to 2017

2.     Both countries saw disinflation from 2013 to 2014

3.     Both countries saw deflation in 2016 before experiencing inflation again in 2017 

            Unemployment

1.     Unemployment in Italy was consistently and significantly higher than in Singapore from 2013 to 2017

2.     Italy was experiencing a small drop in unemployment rate while Singapore was experiencing a small increase in unemployment rate 

bi.        Consumption expenditure

            Investment expenditure

            Government expenditure

            Net exports (export revenue minus import expenditure)

bii.       How fiscal policy contributed

            Tax cuts

1.     Personal income tax cuts à increase after tax income à increase purchasing power à encourages Consumption à increase in AD

2.     Corporate income tax cuts à increase profitability of investments à encourages increase in Investment à increase in AD 

            Increases in government spending

1.     The government can directly increase government expenditure through public works projects (building of infrastructure e.g. roads) & through increased direct hiring (civil servants) à increase AD

            How rapid growth of China contributed

1.     Increase in economic growth à increase disposable income of consumers in China à increase in demand for goods & services which includes imports from U.S. à increase in (X-M) for U.S. à increase AD

Illustrate on AD-AS diagram showing rightward shift of AD curve causing an increase in real national income

c.         Consequences for employment as a result of GDP falling significantly

1.     As GDP falls significantly, firms will decrease output levels as there will be a fall in demand for goods & services

2.     As firms adjust output levels, they will also cut back on hiring factor inputs as they no longer need to maintain such high output levels

3.     This includes cutting back on hiring labour inputs à causing a fall in employment

4.     Cyclical unemployment thus rises

Consequences for living standards as a result of GDP falling significantly

Material SOL

1.     As GDP falls à fall in disposable incomes à reduced purchasing power à reduced ability to buy goods & services à fall in material SOL 

Non-material SOL

1.     As unemployment rate climbs as mentioned à there will rising social & political instability à less sense of security & purpose à fall in non-material SOL

2.     Reduced production à less working hours à more leisure time à improved non-material SOL

di.        Benefits of deflationary policies

            Improved budget position / reduce debt accumulation

1.     Countries carrying out these deflationary policies were ones with rising budget deficit and debt levels

2.     By carrying out deflationary policies (elaborate) à this will reduce government expenditure and raise tax revenues in order to improve budget position from a deficit – hopefully towards a surplus and therefore reduce the debt accumulation caused by a persistent budget deficit 

            Boost investor confidence

1.     A resolute & commitment by such economies to improve their budget position can restore stability in financial markets and therefore encourage an increase / inflow of investments à increase AD & AS à bringing about higher economic growth

            Were they justified

            It’s a paradox

1.     Such deflationary policies are in fact contractionary in nature à reducing AD à reduce real NY & increase in unemployment

2.     As individuals & firms experience a fall in incomes as well - in this case, it is questionable whether the government will actually be able to improve its budget position or in fact, collect less tax revenues

3.     Unemployment benefit payouts may increase as well causing budget position to further worsen

            What does the data show

1.     These economies did not appear to have performed very well, for example Greece was still 24.8% below (and Italy 6.2% below) its 2007 GDP level by 2017.

2.     Damage done in terms of social consequences (support with case information) 

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