(2023) A Level H1 Econs Paper 1 CSQ Q2

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ai. November 2020 and December 2020.

aii.

From January 2021 to June 2021, both Singapore & U.S. had inflation that was generally increasing.

Singapore experienced deflation from July 2020 to Dec 2020 while the U.S. had inflation but was generally decreasing.

Note: There are other ways to rephrase the above that will probably be acceptable (key thing is to explain similarities, differences)

bi.

During the pandemics, many countries experienced a fall in economic growth / recession as well as a rise in unemployment. This was as a result of a fall in Consumption (due to lockdowns) & Investments (poor sentiments) → resulting in a fall in AD → multiplied fall in real national income → lower economic growth
As firms hired less factor inputs like labour → increase in cyclical unemployment

The unprecedented scale in fiscal stimulus spending was meant to increase
C → through transfer payments → increasing disposable income → increase C

I → tax reliefs, subsidies helped to encourage an increase in Investments → increase I

G → direct government spending on hiring and infrastructure spending → increase G

As AD = C+I+G+(X-M), there will be an increase in AD, resulting in a multiplied increase in real national income → higher economic growth.

As firms hired more factor inputs like labour → fall in cyclical unemployment

bii.

1. An appreciation in the country’s currency means that the value of the currency has now increased relative to other currencies.

2. This means that 1 unit of the country’s currency can now buy more foreign currency than before.

3. For example, if 1 unit of the country’s currency (A) used to buy 2 units of Currency B, and after appreciation, it now buys 3.5 units of currency B, we say currency A has appreciated against Currency B.

4. If an importer was buying a good for 200 units of Currency B, it would cost 100 units of Currency A.

5. After appreciation, 200 units of Currency B will only cost 200/3.5 = 57.14 units of Currency A.

6. This makes the cost of importing from country B now cheaper.

7. Why is it potential: Because in the short run, importers may be subject to pre-agreed contracts (possibly in Currency A terms) or if importers do not pass down lower prices to consumers.

c.

When interest rates were kept nearly zero

1. Consumers preferred spending than saving as it was cheap to take loans to buy large ticket items, there was also no incentive to save with low interest rates → increase in C

2. At near zero interest rates, firms could continue taking low interest rate loans to expand → increasing I

3. Increase in C & I → increase in AD → as economy started to approach full employment level → increase in both real NY, as well as an increase in GPL → higher economic growth and also, higher demand pull inflation

4. As interest rates were kept near zero in these economies, it will result in hot money outflows (funds will seek elsewhere for better returns → decrease in demand / increase in supply of domestic currency → depreciation

5. A weaker currency will make exports cheaper / more competitive → increase demand for exports → increase (X-M) → increase AD → as economy started to approach full employment level → increase in both real NY, as well as an increase in GPL → higher economic growth and also, higher demand pull inflation

d.

Skilled Workers

Automation and technological advancements create a higher demand for skilled workers, such as software developers, engineers, and technicians. These workers are needed to develop, operate, and maintain automated systems. This shift in demand can be illustrated with a rightward shift in the demand curve in the labor market for skilled workers.

Supply of skilled workers might be more price inelastic due to the time required for education and training.

The combination of increased demand and relatively inelastic supply (in the short term) leads to a new equilibrium with higher wages and potentially more employment opportunities for skilled workers.

Less skilled Workers

Automation tends to replace tasks that are repetitive and don't require specialized skills, which are often the domain of unskilled workers. This leads to a leftward shift in the demand curve for unskilled labor, as machines and technology take over these tasks.

The new equilibrium in the market for unskilled labor is characterized by lower wages and higher unemployment rates for these workers.

Overall Analysis

The demand-supply dynamics in the labor market for skilled and unskilled workers lead to increasing wage disparities. Skilled workers benefit from sharp increase in wages due to increased demand and an inelastic supply, whereas unskilled workers face wage stagnation or reduction due to decreased demand.

e.

Explain what the considerable uncertainty caused by technological shifts refer to

1. Uncertainty in jobs: automation resulting in structural unemployment (this is a concern by both workers & the government)

2. Uncertainty in business profitability: might entire industries get displaced (e.g. copywriters & lawyers by AI?)

3. Uncertainty in inflation: The immediate increase in commodities prices due to more intensive use for those such as copper and lithium → increase cost of production → decrease SRAS → increase in general price level → cost push inflation

Explain the potential benefits from technological shifts

1. Transit to green vehicles and power plants will allow for growth, that is sustainable (increase in LRAS, and reduced environmental degration)

2. As technological advancements (e.g. vertical farms, telehealth, virtual education platforms) start to increase efficiency, increase in productive capacity → rightward shift of LRAS → higher potential growth

Evaluative conclusion

1. We will likely face some short term pains with these technological shifts - due to structural unemployment and higher inflation

2. But if the long term benefits (through growth becoming more sustainable) are greater than the short term costs, then we should still embrace such changes

3. In addition, government policies can be implemented to mitigate the short term pains (e.g. subsidies for renewable energy)

f.

Contractionary Fiscal Policy

Contractionary fiscal policy involves reducing government spending, increasing taxes, or a combination of both. This approach aims to decrease Aggregate Demand (AD), thereby reducing the overall demand in the economy. When the economy is at or near full employment, a decrease in AD → fall in general price levels → helps reduce demand-pull inflation

Limitations

1. Reducing government spending or increasing taxes can slow down economic growth. This is because government spending is a component of AD, and reducing it can lower consumption and investment in the economy. As demand in the economy decreases, businesses may reduce production, leading to job cuts.

Fiscal policy with supply-side intent

Fiscal policy with supply-side intent, like investing in education (building schools) and training institutes, aim to improve the quality of the labour force. Enhanced skills and education can lead to increased productivity, which in turn raises the economy's productive capacity. This shift can be represented as a rightward shift in the Long Run Aggregate Supply (LRAS), potentially reducing cost-push inflation by making the economy more efficient and productive.

Limitations

1. Increasing government spending on supply-side initiatives can initially worsen demand-pull inflation. This is because such spending boosts AD before the supply-side benefits materialize.

2. The positive effects of supply-side policies on productivity and capacity take time to materialize. The immediate impact on inflation may be limited.

Supply-Side Policies for Automation and Worker Reskilling

Supply-side policies that provide subsidies for firms to automate or reskill/upskill workers can significantly enhance productivity. Automation can increase output with the same or lower input, while a more skilled workforce can produce more efficiently. These factors can lead to a rightward shift in LRAS, increasing the economy's capacity to produce goods and services, and thus, lowering general price levels and reducing inflation.

Limitations

1. Subsidies for automation and training programs can be expensive for the government. This can strain public finances, especially if the government is already dealing with high levels of debt.

2. The benefits of increased productivity from automation and a skilled workforce are not immediate. It takes time for firms to implement new technologies and for workers to acquire and adapt to new skills.

Conclusion

In determining whether supply-side or fiscal policies are better at countering inflation, it's crucial to consider the type of inflation (demand-pull or cost-push) and the economy's current state. Contractionary fiscal policy is more direct in addressing demand-pull inflation, especially in an economy operating near full capacity. However, its negative impacts on growth and employment are significant considerations. Supply-side policies, on the other hand, offer a more long-term solution by increasing productive capacity and efficiency, but they require time and investment to be effective. The best approach may involve a combination of both, carefully balancing the need to control inflation with the goals of sustaining growth and employment.

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