HCI Prelims 2010 Case StudyWorkbook 2A pg 20-22

(a) (i) Explain what is meant by GDP at constant prices. [2]Define GDPWhat is constant prices?GDP refers to the total monetary value of all final goods and services produced within the geographical boundary of a country in a specific period of time, usually a year. [1]GDP at constant prices means that the effects of inflation have been eliminated from the GDP figures, where price level is based on a given base year. [1]

Think! What is the difference between GDP at constant prices and GDP at current prices?Current price GDP measures value-added production in today's prices.

(a)(ii) Describe the trend in GDP in Sg from 2007 (Q3) to 2009 (Q3) [3] Look at the axis carefully! What does it say?

(a)(ii) Describe the trend in GDP in Sg from 2007 (Q3) to 2009 (Q3) [3]

GDP increased at a decreasing rate for the period 2007Q3 to 2008Q3 [2] before it started to decrease until 2009Q3.[1]

Students can also get 2m if they describe the rate of change for the decreasing trend. (GDP decrease at increasing rate then decreasing rate for the period 2008Q3 to 2009Q3)

(b) With the aid of a diagram, explain why the MOS remains upbeat about future economic situation in Sg despite the high inflation rate. [4]The Minister remains upbeat about the Sg economy as:Sg is expecting a strong pipeline of foreign investments and tourism projects that will provide support to the Sg economy.The expected rise in FDI and X will bring about a rightward shift of AD curveReal NY of the country will increase more than proportionatelyCreating employment for the locals as demand for factor inputs including labour, increasesIllustrate with AD-AS diagram

AD-AS diagram to illustrate a rightward shift of AD and LRASGeneral Price Level Real National incomeAD0LRAS0Y0P0AD1LRAS1Y1YF1YF2P2P1Inflationary pressures arising from the rise in AD is not a concern for Sg as the rise in investments will also bring about a rightward shift of the LRAS curve.The rise in GPL is hence cushionedAlso, the rise in LRAS brings about sustained economic growth for Sg.

b) Marking schemeMax 2 if students only show shifts in either AD or AS with diagramMax 3 if students show shifts of both AD and AS w/o touching on the effect on GPLStudents must show both AD and AS shifts and the effect on GPL and output to get max 4

ci) Explain how the data suggest that the US is heading towards stagflation? [3]Stagflation is the economic phenomenon of rising inflation rate and falling output level in the economy. [inflation and recession]The data indicates that the US is likely to head towards stagflation. With reference to Fig 2, the US is facing rising unemployment rate, which has been rising from 4% in 2007 to about 10% in 2010. This suggests a sharp contraction of national output over the same period of time. [1]

ci) Explain how the data suggest that the US is heading towards stagflation? [3]Extract 1 states that there might be cost-push inflation due to surging oil and gasoline prices. [1]This is supported by Fig 3 where US CPI has risen by about (655-608/608 * 100 = 7.7%) from 2007 to 2010. [1]

1m for each evidence identified. Max 2m if students did not attempt to link unemployment to output level even though they covered 3 pieces of evidences.

cii) economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. To what extent is the above view of the economists justified?

Questions on discussDiscuss whetherDiscuss the view thatDiscuss the validity of the statement/view thatDiscuss the extent to whichDiscuss the policy options/measures for..Discuss the impact of Given a quote. Discuss

To what extent Can adopt the Thesis-Antithesis-Synthesis (TAS) structureThe Thesis is that the statement holds or the view is valid. You will need to explain why the statement holds, using relevant economic theory or analysis.The anti-thesis is that it does not hold or is not necessarily true. Explain conditions, circumstances or situations in which the statement or view or theoretical r/s may not hold. It could be that the thesis depends on certain assumptions which may not hold in reality.

TAS structureThe synthesis is an important part of the answer and may be put in the conclusion.It often determines the evaluation marks as it shows whether the student is able to form a judgment after considering the opposing points of view in the thesis and anti-thesis.

In the synthesis, you mayMake an overall judgement whether the statement is valid or notHighlighting the key arguments to support your judgment, which should apply to the context where appropriate. E.g. if the Q is in Sg context, make a judgment whether it is generally true for Sg.Or you may summarise the conditions upon which the validity of the statement or view depends on (i.e. what does it depend on?)

cii) economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. To what extent is the above view of the economists justified?Conflicts may arise when the US govt tries to attain the goal of low unemployment and inflation. [tradeoffs]Whether the US govt should be concerned with the problem of high unemployment or highvinflation depends on the situation of the US economy currently.

cii) To what extent is the above view of the economists justified?Thesis: US govt should view recession as a more immediate threat than inflationJustification:According to Extract 1, spare capacity currently room for AD to grow through expansionary policies to solve demand-deficient unemployment. No pressures for demand-pull inflation to set in as yet.Students can explain the costs of slow economic growth or high unemployment on the economy.

cii) To what extent is the above view of the economists justified?Anti- thesis: US govt should view inflation as a more immediate threat than unemploymentJustification:Even though AD is weak, SRAS is shifting left due to cost-push inflation resulting from global rising food and oil prices (Extract 1)Inflation would be exacerbated if AD shifts right as a result of expansionary demand management policiesStudents can explain the costs of high inflation on the economy.

cii) To what extent is the above view of the economists justified?Synthesis and conclusion:According to Figure 2 and 3, unemployment rate has doubled (from below 5% in 2008 to a high of about 10% in 2009) while GPL has only risen by 2.4% during the same period. Although GPL increased rapidly in mid 2008, it eased by 3Q of 2008.Overall, the evidence seems to suggest that the recession is a more immediate threat than higher inflation.

cii) To what extent is the above view of the economists justified?L1: 1-2 One sided answerL2: 3-4 Two sided answerL3: 5-6 conclusion with a justified stand.Max 3 if students focus on just explaining the negative effects of unemployment and inflation on the economy.Max 4 if students attempt to explain the conflicts of attaining low inflation and unemployment through the use of expansionary AD policiesMax 5 if students attempt to explain the conflicts of attaining low inflation and unemployment through the use of expansionary policies + use of evidences found in the extractsMax 6 if students come to a justified stand using numerical data to support the conclusion