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H1 Economics Preliminary Examination 2010

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 3
rd
qtr of 2007 and
then increased at a decreasing rate ti 2
nd
qtr of 2008. !rom the 2
nd
qtr to the
end of 2008 house prices fe.
(b) "#pain the i$e% &aue of the price easticit% of supp% of houses in Singapore. [2]
'he supp% of houses is i$e% to be price ineastic. ("S is ess than ). *)
mar$+
,ith a rise in the house prices due to the increase in demand for houses- the
quantit% of houses suppied is not abe to increase readi% as ne. pro/ects ta$e
at east 3 %ears to compete and ne. and read% properties ma% not be
reeased b% de&eopers .ho ma% hod bac$ aunches as the% e#pect prices to
increase further in the near future.
*2 mar$s+

(c) ,ith the hep of a diagram- e#pain ho. high goba fue and commodit% prices
resuted in infationar% pressures in the countr%. [0]
High goba fue and commodit% prices high cost of production since
Singapore is reiant on imported fues and commodities in its production
process 1S increases 1S shifts to the eft 1D e#ceeds 1S - hence
e#erting up.ard pressure on the genera price e&e cost push infation.
1D21S diagram to sho. cost push infation is required
Diagram 222) mar$
"#panation 222 3 mar$s
(d) 3sing economic ana%sis- e#pain ho. infationar% pressure and the financia
crisis ha&e affected house prices. [4]
5nfation rate increased due to rising goba fue and commodit% prices cost
of production increased 1S shifts to the eft
'he goba financia crisis resuted in .ord .ide fa in income 6s fe 1D
shifts do.n
'he combined impact of the shifts in the 1S and 1D econom% contracts.
'his caused .or$ers to be retrenched and unempo%ment rate rose.
'he rise in the unempo%ed numbers .oud mean that some peope .oud not
be abe to meet their mortgage repa%ments and .oud ha&e their houses
repossessed supp% of houses increased in the mar$et.
'his increase in supp% couped .ith o. demand as peope are ess confident
1
of their abiit% to pa% up their housing oans or to meet mortgage
requirements house prices fe.
"#panation of infationar% pressure and goba financia crisis on the econom%
and reate to demand for and supp% of houses 222 0 mar$s
1na%sis of changes in demand and supp% and the impact on house prices 222
2 mar$s
(e) 3sing the information pro&ided in "#tract )- e#pain the impact of changes in
house prices on the macro econom%.
[5]
Houses are a form of .eath for most peope. 1 change in house prices has a
significant impact on consumer .eath and consumer confidence hence
consumer spending is affected.
!aing house prices a decine in .eath peope become ess confident
about borro.ing and spending 7 fas 1D fas and the econom%
.ea$ens .ith nationa income and empo%ment e&e faing.
8ising house prices ao. home o.ners to remortgage their houses and ha&e
cash for spending. 1so- home o.ners .oud fee richer .hen house prices
soar since houses are the biggest form of .eath for them. Hence 7
increases stimuating the econom% nationa income and empo%ment e&e
.oud increase.
(f) (i) "#pain one measure the Singapore go&ernment has ta$en to boost the
housing mar$et. [3]
1 rea#ation of foreign o.nership rues on apartments .oud ma$e it
easier for the significant number of e#patriates .or$ing in Singapore and
foreigners to purchase houses demand for houses increases
quantit% transacted increases and house prices increase significant%
since supp% of houses is in genera price ineastic.
9r
1n increase of the ma#imum oan2to2&aue ratio from 80: to ;0:
peope can obtain more oans demand for houses increases
quantit% transacted increases and house prices increase significant%
since supp% of houses is price ineastic.
9r
1 reduction of cash do.n pa%ments from )0: to 5: for home purchase
demand for houses increases quantit% transacted in the mar$et
increases and house prices increase significant% since supp% of houses
is price ineastic.
<a# 2 mar$s if ("S is not mentioned.
2
(ii) ,ith reference to the data pro&ided .here appropriate- and the
microeconomic goas of the go&ernment- discuss .hether there is
/ustification for inter&ention in the housing mar$et. [8]
<icroeconomic goas of the go&ernment=
2aocati&e efficienc%
-equit%
,ithout go&ernment inter&ention- the price of houses and the quantit% of
houses transacted in the free mar$et are determined entire% b% the
mar$et forces of demand and supp%. 'he mar$et2cearing quantit% .oud
not be at the socia% optima e&e as the free mar$et .i not ta$e into
consideration the positi&e e#ternaities *socia cohesion and socia
stabiit%+ of homeo.nership- resuting in under2consumption and hence
aocati&e inefficienc%.
Socia margina benefit *S<>+ of housing e#ceeds the pri&ate margina
benefit *(<>+ and the quantit% transacted in the mar$et is o.er than the
socia% optimum. 3ness there is some form of go&ernment inter&ention-
there .i be under2consumption- resuting in .efare oss to societ%.
["#pain .ith the hep of a diagram to sho. mar$et faiure 222 under2
consumption of housing]
'o ensure a higher e&e of home o.nership- house prices must be made
affordabe. 1 go&ernments are obiged to pro&ide pubic housing through
direct inter&ention in supp%ing housing and ma$ing them affordabe to
the o.er income group- or through indirect inter&ention in the form of
subsidies- ta# poicies and contro of and supp%.
<ost go&ernments inter&ene in the housing mar$et b% buiding and
seing ne. houses?fats and pricing them at affordabe rates usua% at a
significant discount off the mar$et &aue of simiar d.eings. 'his heps
raise homeo.nership.
'o further impro&e affordabiit%- subsidies i$e housing grants and
subsidi@ed housing oans- and ta# poicies i$e reduction of capita gains
and propert% ta#es .oud ma$e homeo.nership attracti&e and hence
raise (<> up.ards to.ards S<> prices fa and the quantit%
transacted in the mar$et .oud increase and .efare oss .oud then be
reduced.
Since price of pubic housing is beo. the mar$et price- demand .i
e#ceed supp%. 'here is therefore need to impose restrictions i$e ceiings
on househod incomes for eigibiit% to purchase and criteria for subsidies
in order to better direct the assistance to the o.er income group.
5n the resae and pri&ate propert% mar$ets- it .oud be more efficient to
ea&e mar$et forces to determine the quantit% and price of houses.
3
Ho.e&er- a boom ma% resut in high house prices and threaten the
formation of an asset bubbe in the countr%. Hence- there is a need for
the go&ernment to $eep .atch o&er house prices and inter&ene to contro
the rapid increase in prices. <easures such as tightening oans and
reeasing more and to buid houses .oud decrease the demand and
increase the supp% of houses respecti&e% pre&enting house prices from
soaring to reach heights .hich .oud be be%ond .hat the first2time
bu%ers can afford. Soaring house prices ma% ead to o&erheating in the
econom% and threaten stabiit%.
'hrough home o.nership- peope in the countr% acquire a store of &aue
.hich the% can encash in times of need. Home o.nership aso protects
the o.er income group from rising rents in times of infation. 'his is
especia% hepfu to the o.er income group- pro&iding some form of
financia securit%.
House &aue appreciates .ith the countr%As gro.th- the benefits of gro.th
percoate to the o.er income groups as .e. 'his contributes equit% and
socia stabiit%.
,hie go&ernment inter&ention is needed and /ustified to ensure that
home o.nership is at the socia% optima e&e to ma#imi@e societ%As
.efare and that .eath is distributed to the o.er income group as .e-
there is opportunit% cost to be considered. 'here ma% be funding probem
.ith the arge amount of subsidies offered and the funds .oud be
directed a.a% from other de&eopment pro/ects .hich can raise
producti&e capacit% and contribute to the econom%As gro.th. 'he right
amount of subsidies to increase the consumption of housing to the
optima e&e is often difficut to ascertain. 'here is aso the concern that
achie&ing a high e&e of home o.nership might mean that peope are
committing arge proportion of their sa&ings to housing resuting in the
possibiit% of insufficient iquidit% for od age needs.
'herefore- reguar re&ie. of go&ernment housing poicies to ensure that
costs and benefits of go&ernment inter&ention must be appropriate%
baanced. 5t is important for the go&ernment to .atch the housing mar$et
and to act /udicious% so as not to ao. booms and busts in the mar$et
as instabiit% in this mar$et can affect the econom% and the &arious
income groups.
B) Statements of microeconomic goas and descripti&e
ans.er on either the genera reasons for or the measures
of go&ernment inter&ention .ithout direct% addressing the
question
)23
B2 7ear e#panation of mar$et faiure and rationae for
go&ernment inter&ention to achie&e aocati&e efficienc%
and equit%. Some attempt to e&auate go&ernment actions.
024
B3 'horough e#panation on go&ernment inter&ention in the
housing mar$et to achie&e aocati&e efficienc% and equit%
728
4
and e&auation of the actions. 1ns.er arri&es at a cear
and reasoned concusion.
Question 2
(a) (i) 7ompare 3S trade baances .ith 7hina and .ith the .ord for the
period 2005 to 2008. [2]
3S trade baances .ith 7hina and .ith the .ord .ere in deficit.
'he trade deficit .ith 7hina increased throughout the period .hie the
trade deficit .ith the .ord increased from 2005 to 2004 and then
impro&ed from 2007 to 2008.
) mar$ for each comparati&e statement
(ii) Ho. does the &aue of the 7hinese currenc% in 2008 compare to its
&aue in 2000C [)]
'he 7hinese currenc% appreciated against the 3S doar.
(iii) >ased on the data on 3S trade- .hat e&idence is there to suggest that
a re&auation of the 7hinese currenc% against the 3S doar ma% not
correct 3S trade imbaanceC [3]
,ith a re&auation of the %uan- 7hinaAs e#ports .oud become more
e#pensi&e in the 3S .hie imports from 3S .oud be cheaper in 7hina.
'he &aue of 3SAs net e#ports .i increase if the <arsha2Berner
condition *i.e. sum of price easticities of demand for e#ports and
imports is greater than )+- hence reducing 3S trade deficit .ith 7hina.
Ho.e&er- the %uan appreciated from 2005 on.ards but 3S trade
baance .ith 7hina remained in deficit and the deficit continued to
increase.
<oreo&er- gi&en that e#ports to 7hina is a sma proportion of her tota
e#ports and imports from 7hina constitutes an e&en smaer proportion
of her tota imports- e&en if there is impro&ement in her trade baance
.ith 7hina- it .oud not correct her baance of trade position.
(b) "#pain ho. the trend in 7hinaAs foreign reser&es is affected b% the changes
in the indicators as sho.n in 'abe 3. [0]
7hinaAs foreign reser&es rose o&er the period 2000 to 2008.
'he surpus in the current account gre. b% more than 300:. 'his resuted in
significant currenc% fo. and pushed up the reser&es.
!rom 2000 to 2000- the e#terna &aue of the %uan in 3SD had remained at
8.28- suggesting that 7hina had been offering the %uan to bu% up 3S doars-
resuting therefore in gro.th of foreign reser&es.
2 mar$s for gi&ing a brief e#panation of ho. a change in each indicator can
cause the reser&es to increase.
5
(c) Discuss .hether the 3S go&ernmentAs decision to boost tariffs on 7hinese2
made t%res can be /ustified in terms of economic theor%. [8]
1ccording to the Ba. of 7omparati&e 1d&antage- a countr% shoud
speciai@e and e#port the good?ser&ice that it has a o.er opportunit% cost in
producing and imports the good that it has a reati&e% higher opportunit%
cost in producing than another countr%. 'his .i resut in increase in .ord
output and the countries engaging in trade .i aso mutua% benefit as both
countries are abe to consume be%ond their production possibiit% cur&es.
Hence .efare is ma#imi@ed if countries speciai@e in the production of the
goods?ser&ices in .hich the% ha&e the o.est opportunit% cost. 'his is the
basis of the argument in fa&our of free trade.
'he ca to increase tariffs on 7hinese t%res is an attempt on the part of the
3S to correct the trade deficit .ith 7hina. 'here is caim that the
under&auation of the %uan has made 7hinese goods much cheaper in the
3S arge infu# of imports from 7hina trade deficit .ith 7hina. 5n
addition- as 3S producers find it difficut to compete .ith the cheaper
7hinese product- there .oud be a% offs unempo%ment in the 3S.
'he imposition of higher tariffs on 7hinese t%res .oud raise the price of
imported 7hinese t%res in the 3S- resuting in reduced amount of 7hinese
t%res imported into 3S impro&es 3S trade deficit .ith 7hina. 1so- as
domestic producers are protected from competition from 7hina domestic
production is stimuated /obs are not /ust sa&ed but more /obs can be
created.
"&auation of the tariff proposa=
'he decision to increase tariffs ma% not be &er% effecti&e in correcting
3S trade deficit if the demand for 7hinese t%res is price ineastic.
3S firms producing t%res in 7hina and se t%res bac$ to 3S .i be
ad&erse% affected earnings from such o&erseas in&estment fa-
affecting 3SAs current account.
7ar manufacturing industr% .oud e#perience higher cost of
production due to increased domestic price of t%res after the
imposition of tariff reduces supp% of t%res.
3S consumers ose out as the% ha&e to pa% higher prices on t%res
.hether imported from 7hina or domestica% produced.efare
oss.
(rotecting the domestic t%re industr% ma% resut in compacenc% and
inefficienc%.
8etaiation .oud resut in a contraction in trade *7hina threatens to
cut imports of 3S auto parts and chic$en .ings+ no one .ins as
trade contracts 1D in both 3S and 7hina .oud fa
unempo%ment in both countries
3SAs decision .oud hurt not /ust 7hina but the 3S econom%. 5t is certain%
not /ustified especia% if 7hina has the comparati&e ad&antage in producing
6
t%res. 5f the 3S cannot produce t%res at a o.er opportunit% cost than 7hina-
then the tariff .oud resut in inefficient use of resources in the 3S eading to
higher opportunit% costs.
B) S$etch% ans.er .ith some reasons .h% tariffs are imposed
and ad&antages and disad&antages of protectionism .ith
hard% an% reference to the conte#t
)23
B2 7ear e#panation of the reasons behind the imposition of
tariffs and the ad&antages and disad&antages .ith reference
to the conte#t
024
B3 Discussion of the ad&antages and disad&antages of the tariff
proposa .ith appication and reference to the conte#t and
the ree&ant economic theor%
728
(d) (i) "#pain the reationship bet.een 7hinaAs current account baance and
its economic gro.th rate as obser&ed in 'abe 3. [0]
'here is in genera a direct reationship bet.een 7hinaAs current
account baance and its economic gro.th rates. *5 mar$+
"#panation for the direct reationship=
,hen the surpus in the current account increases- it is i$e% that there
is a surpus in the trade in goods and ser&ices account *trade in goods
and ser&ices being the argest component in the current account+
&aue of net e#ports increases 1D increases nationa income
increases b% a mutipe &ia the mutipier. Hence .hen there is an
impro&ement in the current account- the gro.th rate increases and
&ice &ersa. *3 mar$s+
(ii) ,ith reference to the data .here appropriate- assess .hether the
increase in 7hinaAs ED( is primari% due to its rising e#ports to the
rest of the .ord. [8]
5ncrease in 7hinaAs ED( is dependent on e#porting to the rest of the
.ord
'rade is an important factor contributing to 7hinaAs gro.th
27hina .as the .ordAs second argest merchandise e#porter in
2008
2arge info. of !D5 in 7hina resuted in increased trade
conducted b% these foreign2in&ested firms e#port2ed gro.th
2.hen 1merican consumer spending fe 7hinese e#ports
fe as 3S is a ma/or importer of 7hinese goods 1D fe
rea ED( gro.th fe
9ther important factors contribute to the increase in 7hinaAs ED(
!D5 fo.s is a ma/or factor contributing to the increase in
7hinaAs ED(
2foreign firms set up in 7hina 1D increases actua gro.th
2foreign firms bring in technoog%- e#pertise and $no.edge
increase producti&e capacit% in 7hina 1S shifts to the right
7
B8 potentia gro.th
,hen the goba economic crisis occurred and e#ports and
!D5s decreased Eo&ernment poicies .ere in pace and
.ere critica in pre&enting a contraction in the ED(
Eo&ernment poicies i$e increased spending on infrastructura
de&eopment 1D increases in the S8 resuting in actua
gro.th. 5nfrastructura de&eopment aso enhances producti&e
capacit% and brings about gro.th in the B8
"as% monetar% poic% boost pri&ate spending 7 F 5
increase 1D increases nationa income increases b% a
mutipe
1ssistance pro&ided to &arious industries heps in enhancing
efficienc% and producti&it% resuting in increased output
industries continue to thri&e
<ore recent%- the gro.ing midde cass in 7hina has heped
de&eoped a arger domestic consumer mar$et. 'his is
especia% significant in ma$ing 7hina ess dependent on
e#terna demand to gro. her econom%
,hie e#porting to the rest of the .ord contributes significant% to the
increase in 7hinaAs ED( - other factors aso pa%ed a part in the
gro.th in its ED(. Ei&en that hea&% reiance on e#terna demand
.oud increase the econom%As &unerabiit% and sub/ect it to greater
instabiit%- 7hina is increasing% a.are of the need to stimuate
domestic demand to achie&e increase in her ED(.
B) <ere isting or brief e#panation of factors contributing
to the increase in 7hinaAs ED( .ith hard% an%
reference to the case.
) 2 3
B2 "#panation of some factors contributing to the
increase in 7hinaAs ED( .ith itte e&auati&e
comments and insufficient reference to the case.
0 2 4
B3 7ear e#panation and discussion of the factors
contributing to the increase in 7hinaAs ED( .ith
reference to the information in the case- and arri&ing at
a reasoned concusion.
7 2 8
8
Question
!es"ite an a#era$e $ro%th rate of nearly & "er cent from 200' to 200() Sin$a"ore
%as the first East *sian country to fall into a recession from the current $lobal
economic crisis after +uly 200&,
Sandre -han$a#elu) +anuary .
th
200/
Ex"lain ho% the current $lobal economic crisis has caused the Sin$a"ore
economy to fall into a recession and assess the effecti#eness of the measures
ado"ted by the $o#ernment in sol#in$ the "roblem, (2.)
*nalysis of Question0
1ommand %ords0 e#pain G cear e#panation of ho. the goba crisis caused
recession- assess G ana%se and /udge the &arious measures used to so&e the
recession probem.
2ey %ords0 goba economic crisis- recession- poic% measures
1ontext0 Singapore econom%
3ntroduction0 Ex"lain the meanin$ of recession and the im"act on Sin$a"ore $i#en
the characteristics of the Sin$a"ore4s economy,
1 recession occurs .hen there is a fa in an econom%As rea ED( for at east 2
consecuti&e quarter period. Singapore being a &er% sma and open econom% .hich is
high% dependent on trade- suffered ad&erse% from the goba economic crisis .hich
started in the 3S1. 'his goba economic crisis has ed to a fa in SingaporeAs rea ED(
and caused a recession in Singapore in 200;.
!e#elo"ment
5Ex"lain ho% the $lobal crisis caused a fall in Sin$a"ore4s ex"ort,
2Eoba so.do.n ed to a fa in demand for SingaporeAs e#port- .hich is an important
component of 1D.
2as .ord income fe- .ordAs demand for consumer goods fe. 'his ed to a fa in
demand for SingaporeAs eectronic consumer goods as .e as a fa in demand for
eectronic components such as integrated circuits ? dis$ dri&es etc .hich are the main
manufacturing e#ports of Singapore.
2in addition- ser&ices sectors are aso affected-eg. tourism- financia- port ser&ices as the
purchasing po.er fe.
2thus- .hen fa in e#port re&enue H fa in import e#penditure- net e#port .i fa- ceteris
paribus- 1D .i fa.
5Ex"lain ho% $lobal crisis led to a fall in *! and national income
2 Due to fa in e#port re&enue- firms profit fe and business sentiments .ere ad&erse%
affected. 'his ed to a fa in in&estment spending .hich is another component of 1D.
'hus the o&era fa in 1D due to a fa in e#port and in&estment caused a mutipe fa in
nationa output and income through the mutipier process. 'hus- as rea nationa income
fas- the econom% e#perienced a recession . * "#pain using 1D?1S diagram+
9
Eoba recession has ad&erse effect on the Singapore econom%- gi&en our hea&%
reiance on trade and !D5. 'his eads to negati&e economic gro.th in Singapore-
affecting the standard of i&ing of the citi@ens and .orsened the >9(. 'hus- the go&t
used &arious poicies to mitigate the negati&e impact caused b% the goba so.do.n.
5Ex"lain the #arious "olicies used by the Sin$a"ore $o#ernment to reduce the
ne$ati#e im"act of recession,
2Singapore go&t has impemented &arious poicies to reduce the negati&e impact of the
goba recession on SingaporeAs econom%. Eo&t uses both e#pansionar% fisca poic%-
e#change rate poic% as .e as supp%2side poicies to address the probems.
i) Ex"lain the use of ex"ansionary fiscal "olicy to miti$ate the im"act of recession
"#pansionar% fisca poic% is one of the important poicies adopted to stimuate 1D to
a&ert the recession. Eo&t spending increased and ta#es .ere reduced.
"g. go&t spending on infrastructure- heath care and education *D0.0b+- go&t spending of
D0.5b on /ob credit scheme to hep firms sta% afoat b% gi&ing cash grants to retain /obs
etc.
"g. reduction in corporate ta# rate from )8: to )7:- ta# rebates to househods.
,hen go&t spending increases- ceteris paribus- 1D .i rise as go&t spending is a
component of 1D.
,hen ta#es such as corporate ta# .as reduced- it pro&ided the incenti&e for firms to
increase in&estment spending- .hich is a component of 1D as o.ering of corporate ta#
increased the after2ta# profits of firms. 'a# rebates gi&en to househods increase their
disposabe income .hich hep to encourage househods to spend on consumer goods.
'hus .ith a rise in go&t spending and increase in in&estment and consumption spending-
1D .i rise. Higher spending in the econom% .i ead to a fa in firms stoc$ and this
indicates a need for firms to increase production and thus through the mutipier process-
nationa income and output .i rise a mutipe times. 'hus- the rise in nationa income
.i reduce the probem of recession caused b% the fa in e#terna demand.
"&auation=
2poor sentiments of consumers and firmsIH o.er corporate ta# rates and ta# rebates
ma% not boost 7 and 5 spending.
2/ob credit scheme aims at retaining /obs during the do.nturn b% reducing firmsA abour
cost. Ho.e&er- this scheme ma% not be abe to $eep /obs if firm incur osses and abour
cost is on% a sma proportion of tota cost of production.
2gi&en SingaporeAs high dependence on imports and high sa&ings- the mutipier si@e is
&er% sma. Hence- an% increase in 1D through e#pansionar% !( has imited impact on
increasing nationa income and empo%ment.
2gi&en that Singapore is high% dependent on e#ports- e#pansionar% !( is used on% as a
buffer to reduce the se&erit% of the recession but is not a measure to get Singapore out
of the recession.
ii) Exchan$e rate "olicy0 maintain a neutral stance to maintain "rice
com"etiti#eness of ex"orts,
"&auation=
2price competiti&eness of e#ports ma% not be sufficient to increase demand for
SingaporeAs e#ports gi&en the fa in purchasing po.er of foreign consumers due to the
recession.
10
2 .ea$er SD IH higher prices of imports and ma% cause imported infation thru higher
cost of production gi&en that some of our e#ports ha&e high import content.
iii)Su""ly side "olicies to im"ro#e Sin$a"ore4s com"etiti#eness in the lon$ run
2 "ncourage abour to upgrade through training during do.nturn so that .hen the
.ord econom% reco&ers and dd for SingaporeAs e#ports pic$s up- .e are abe
compete in terms of price and non2price competiti&eness. "g. Spur
2 Eo&t spending on 8FD ? inno&ations IH increase our producti&e capacit% in the B8
2 Eo&t spending on infrastructure
"&auation=
2 Supp% side poicies used b% the Singapore go&t is aimed at impro&ing the ong run
capabiities of the econom% during the do.nturn. 'hrough supp%2side measures-
our econom%As competiti&eness is enhanced so that .hen the goba econom% pic$s
up and the e#terna demand rises- the econom% is abe to produce high quait%
e#ports to meet the rising demand.
i#) -rade "olicy to di#ersify and ex"and ex"ort market) e$, Si$nin$ more 6-*s)
less reliance on 7S and E7 markets,
7oncusion= Ei&en our high dependence on e#terna demand- the goba so.do.n has
affected us quite bad%. 'he poicies adopted ha&e heped to reduce the negati&e
impact of the recession on the econom%. Ho.e&er- the reco&er% from the recession has
to depend on the reco&er% of the goba demand and these poicies can on% hep to
reduce the se&erit% of the recession in the short run and aso hep to impro&e our
producti&e capacit% in the ong run to meet the e&entua rise in goba demand .hen the
.ord econom% reco&ers.
Be&e )= )28m 1ns.er mere% states the impact of a fa in nationa income and
gi&es brief mention of some poicies to so&e the recession
probem .ithout ana%sis.
Be&e 2= ;2)0m 1ns.er e#pains ho. goba crisis affected SingaporeAs e#ports
and in&estment and ana%ses the subsequent impact on nationa
income using 1D?1S ana%sis.
1ns.er ana%ses at east 2 poicies used b% the Singapore
go&ernment to address the economic so.do.n.
Be&e 3= )522)m 1ns.er ana%ses thorough% ho. goba crisis affected
SingaporeAs econom% in terms of e#ports and in&estment and the
impact on nationa income .ith specific reference to Singapore
econom%.
1ns.er ana%ses and e&auates ho. demand and supp%2side
poic% measures .ere used to address these probems .ith
specific reference to the Singapore econom%.
") = )22m 1be to form some &aue /udgement on the effecti&eness of the
poicies used to so&e the probem.
"2 = 320m 1be to gi&e /udgement on the effecti&eness of the poicies used
11
.ith /ustifications. eg. !( is necessar% to buffer the negati&e
impact on the econom% but the need for supp%2side poices as a
ong term measure to boost SingaporeAs capacit% and efficienc%
and to meet the rising demand for our e#ports .hen the goba
econom% reco&ers e&entua%.
Question '
8o#ernments around the %orld aim to achie#e macroeconomic ob9ecti#es of "rice
stability) full em"loyment) hi$h and sustained economic $ro%th and healthy
balance of "ayments,
(a) Ex"lain the im"ortance of achie#in$ these macroeconomic ob9ecti#es,
:10;
(b) !iscuss the #ie% that $o#ernments are not able to achie#e all the ob9ecti#es
simultaneously,
:1.;
*nalysis of Question
1ommand %ord0 "#pain G ana%se some important benefits of achie&ing the 0
macroeconomic ob/ecti&es.
2ey conce"ts0 macroeconomic ob9ecti#es 2 price stabiit%- fu empo%ment- sustained
economic gro.th and heath% baance of pa%ment.
a+
3ntroduction0 State the ' macroeconomic ob9ecti#es
!e#elo"ment
5Ex"lain the benefits of achie#in$ "rice stability
(rice stabiit% pro&ides a conduci&e en&ironment .hich is important for production-
in&estment and sa&ings to ta$e pace. ,ith rising infation- firms canAt pro/ect their future
returns easi% and thus- discourage in&estment .hich is important for economic gro.th.
,ith price stabiit%- production and in&estments are encouraged and this eads to higher
empo%ment and economic gro.th.
5Ex"lain the benefits of achie#in$ full em"loyment
1chie&ing fu empo%ment or o. unempo%ment heps to ensure that the econom%As
scarce resources are fu% utii@ed so that the econom% is abe to achie&e fu
empo%ment output and higher standards of i&ing for its citi@ens.
5Ex"lain the benefits of achie#in$ economic $ro%th
"conomic gro.th refers to both actua and potentia gro.th. 5t is an important ob/ecti&e
because .ith economic gro.th- there is higher nationa output .hich .i raise the
standards of i&ing of the citi@ens. "conomic gro.th aso heps to reduce income
inequait% in the econom% as go&ernment has more funds a&aiabe to assist the poor in
the econom%.
5Ex"lain the benefits of achie#in$ healthy balance of "ayments
12
'o achie&e a heath% baance of pa%ments means that the countr% en/o% surpus in its
trading .ith the rest of the .ord. 'his ob/ecti&e is important because a heath% >9(
means that the econom% is performing .e and accumuating foreign reser&es .hich
can be used to ensure the stabiit% and strength of the countr%As e#change rate.
7oncusion= 1 go&ernments aimed to achie&e these macro economic ob/ecti&es as the%
bring about benefits to the econom% and the citi@ens.
Be&e )= )23m <ere stating of some benefits or probems of not achie&ing
these macroeconomic ob/ecti&es
Be&e 2= 027m 1be to e#pain the benefits of achie&ing at east 223
ob/ecti&es. *2 .e2e#pained benefits 222ma# 4m+
Be&e 3= 82)0m 1be to e#pain thorough% the benefits of a the 0 macro
ob/ecti&es.
b+
*nalysis of Question
1ommand %ord0 Discuss G ana%se and e&auate the abiit% of go&ernments to achie&e
the 0 macroeconomic ob/ecti&es .ith reference to both short and ong run periods.
2ey %ords<conce"ts0 macroeconomic ob/ecti&es simutaneous%
3ntroduction
"#pain the importance of achie&ing these 0 ob/ecti&es but recogni@e that these
ob/ecti&es ma% not be achie&abe- especia% in the short run.
-hesis0 =b9ecti#es are not achie#able simultaneously
JEx"lain the "ossible conflict bet%een "rice stability and full em"loyment
'o achie&e price stabiit%- especia% demand2pu infation- go&ernment ma% need to
adopt contractionar% demand side poicies .hich cause a contraction in 1D and nationa
income. 'herefore- achie&ing price stabiit% ma% resut in unempo%ment.
9n the other hand- to achie&e fu empo%ment- go&t ma% ha&e to use e#pansionar%
demand side poicies to stimuate 1D and output. 5f 1D rises too much- it ma% cause
infationar% pressure if the econom%As resources are fu% utii@ed.
JEx"lain the "ossible conflict bet%een economic $ro%th and healthy >=P
Higher economic gro.th resuts in higher purchasing po.er of the citi@ens. 'his ma%
cause a rise in consumption of both domestic and foreign goods. 1so- high economic
gro.th ma% aso ead to a rise in imports of inputs. 'hus- import e#penditure ma% rise
and ceteris paribus- eads to a .orsening of the current account of the >9(.
'hus- there are possibe conficts bet.een the &arious ob/ecti&es and go&ernments ma%
not be abe to achie&e a the four ob/ecti&es simutaneous% in the short run. 'he reason
.h% these ob/ecti&es coud be in confict .ith each other coud be due to the use of on%
one poic% to address one macro probem. "g- to achie&e price stabiit%- the use of
contractionar% !( or <( eads to a contraction in 1D and nationa output and
empo%ment. 'herefore- price stabiit% is achie&ed at the e#pense of fu empo%ment.
*nti?thesis0 =b9ecti#es are not in conflict < ob9ecti#es can be achie#ed
simultaneously in the @A
5Ex"lain the use of su""ly?side "olicies to achie#e the ' ob9ecti#es simultaneously
13
2 5n the ong run- the use of more than one poic%- especia% .ith the use of supp% side
poicies- can hep the go&t to achie&e a the 0 macroeconomic ob/ecti&es
simutaneous%.
2 "#pain ho. the use of supp%2side poicies hep to increase producti&e capacit% and
B81S.
"g. go&tA subsidies on research and de&eopment IH impro&e production processes-
reduce cost of production IH impro&e efficienc% and reduce costs of production
"g. go&tAs subsidies on training and educationIHimpro&e the s$is and quait% of abour
force- ma$es abour mar$et more fe#ibe IH reduce structura unempo%ment and
impro&e abour producti&it%.
"g. go&tAs o.ering of corporate ta#IH incenti&es for in&estmentIH increase in capita
accumuation- higher e&e of technoog%- impro&e efficienc%
2Supp%2side poicies thus impro&e producti&e capacit% of the econom% causing a
right.ard shift in econom%As 1S in the B8. 1s the econom%As abiit% to produce g?s
increases- so there is ess infationar% pressure e&en .ith a rise in 1D. 'his heps to
ensure that the countr%As e#ports are price competiti&e. 1so- supp%2side poicies .hich
focus on 8FD- hep to impro&e the costs of production and impro&e the quait% of
e#ports. 5n the ong run- this heps to boost e#port re&enue and impro&e current account
baance. Stabe prices in the econom% aso hep to attract more !D5 .hich heps to
impro&e capita account and boost actua and potentia gro.th of the econom%.
JEx"lain the need to use demand?side "olicies to$ether %ith su""ly?side "olicies
to achie#e the macroeconomic ob9ecti#es,
2 ,ith the use of aso demand Gside poicies such as e#pansionar% !( and <( to boost
1D- the econom% .i be abe to ensure that the ob/ecti&es of fu empo%ment- price
stabiit% and gro.th can be achie&ed in the ong run. 'his is because .ithout a rise in
1D- it is uni$e% that the higher producti&e capacit% .i be put to use. *3se 1D?1S
diagram to e#pain+.
7oncusionK o&era e&auation
7onficts bet.een macro economic ob/ecti&es ma% arise in the short run but in the ong
run- .ith the use of more than one poicies- both demand2side and supp%2side poicies-
can hep the econom% to achie&e the four macro ob/ecti&es simutaneous%.
Be&e )= )23m 1ns.er mere% states some conficts bet.een the &arious
macro ob/ecti&es but is ac$ing in ana%sis. Lo attempt to
e#pain ho. in the B8 these economic ob/ecti&es ma% be
attained .ithout conficts.
Be&e 2= 027m 1ns.er cear% e#pains ho. the pursuit of economic
ob/ecti&es can ead to conficts in the S8 and ho. the 0
ob/ecti&es can be achie&ed in the B8 .ith the use of supp%2
side poicies.
Be&e 3= 82))m 1ns.er ana%ses cear% the possibe conficts bet.een
ob/ecti&es in the S8 and e#pains thorough% ho. supp%2side
poicies can hep to achie&e a the 0 ob/ecti&es .ithout an%
possibe conficts in the B8.
")=)22m Some /udgement as to .hether the 0 macroeconomic
ob/ecti&es can be achie&ed .ithout conficts.
"2=320m Some reasoned /udgement that both demand and supp%2side
poicies are needed to achie&e the macroeconomic ob/ecti&es
.ithout conficts.
14

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