2015 a Levels H2 Paper 2 Essay Q5

A Levels 2015 Q5 During During the recen recentt worldworld-wide wide recess recession ion many many Europe European an countr countries ies chose chose low interest rates as a monetary policy approach rather than adopting demand –led sca s call poli policy cy stim stimula ulati tion on!! At the the same same time time"" with with most most o# thes these e coun countr tries ies$$ govern government ments s intro introduc ducing ing large large cuts cuts in govern government ment e%pen e%pendit ditur ure e in order order to reduce their &udget decits" a scal contraction actually resulted! Discuss which policy approach is appropriate #or a country during a world-wide recession! '25( )ommand* Discuss )ontent* +olicy ,monetary policy" scal stimulation policy" cuts in government e%penditure to reduce &udget decits )onte%t* .eneral Question /euirement* 1 Appro Appropri priate ate polici policies es 2 Duri During ng rece recess ssio ion n ey E%planation Analysis ntroducti  3he recent world-wide recession led to countries e%periencing high on unem unempl ploy oyme ment nt and and low low inve invest stor ors$ s$ con conde denc nce! e! 4ome 4ome o# the the countries which are highly dependent on trade might suer #rom a #all in demand #or its e%ports and hence 67+ worsens! 4ome o# the policies are more appropriate #or some while not so appropriate #or the others! )ontent t is appropriate #or E9 to adopt e%pansionary monetary policies Analysis* are they are una&le to administer scal policies due to some o# the E9 countries suering #rom large &udget decits to spur economic 8onetary recovery and lowering o# employment! policy  3hus when the central &an: reduce commercial &an:s$ reuired reserve ratio to simulate lending" money supply will increase #rom 84 to 841 as &an:s can give out more loans! 3here will &e an e%cess uantity o# money supplied at the prevailing interest rate" r! +eople will use this e%cess holding o# money to &uy &onds" there&y driving up &ond prices and lowering interest rates #rom r to r1! According to the marginal e;ciency o# investment ,8E theory" lowe lowerr inte interrest est rate rates s will will enco encour urag age e inve invest stme ment nt , to 1" 1" as investors enigure 1 while general price level will increase #rom + to +1!

>ig1 * 8oney demand and supply >ig2* 8E o# an economy

)ontent Analysis* >iscal +olicy 4timulati on

>ig?* AD-A4

@owever" due to the low investors$ condence in the glo&al economy" low interest rates might not have eectively increase the uantity o# investment! @ence the actual economic growth may not achieved and since rms may &e unwilling to invest hence or some countries li:e 4ingapore did not e%perience large &udget decit" may still nd it appropriate to employ the use o#  e%pansionary scal policies to revive growth and reduce cyclical unemployment!  3hese countries can adopt e%pansionary scal policies during periods o# recessions through the increase in . or decrease in ta% rates! 4ince one o# the reasons #rom 4pore$s recession and high cyclical unemployment is due to the worldwide economic recession" this lead to low investors$ condence and nudges investors to leave! At the same time" 4pore was also #acing tough competition #rom developing countries li:e )hina which is attracting investors li:e magnet! n order to retain e%isting investors and to attract new ones amidst the recession" 4ingapore could reduces its corporate ta% rates #rom 1B to 1CB!  3he #all in corporate ta% rates increases post-ta% prots and hence increases prota&ility! 3his will attract new retain investors" and allow rms to have more #unds to continue to invest! 3hrough" multiplier eect /= increase and with rms hiring more >7+ such as la&our to cope with higher level o# production" cyclical unemployment #alls! And AD increases and shi#t rightwards causing increase in real national income as seen in >igure ?! @owever" while this gives incentives to investors and producers may not &e use#ul i# condence level were not resolve! 3his worldwide recession has happened #or uite some time and it seems to have signs o# recovery" it is li:ely that condence level would rise again and #all in ta% is timely to ride on the pic:up o#  condence level to &oost economy!

onetheless" even i# the 4ingapore government has success#ully implemented the appropriate policies to achieve #ull employment" there may &e still some people who are unemployed in the economy due to #rictional unemployment! 3his is &ecause there it ta:es time #or wor:ers to &e matched with the suita&le
)ontent Analysis* E%change rate policy

>urthermore" other countries li:e ndonesia might also reduce their corporate ta% to &e competitive as 4ingapore" hence might have muted the eect o# our lower corporate ta% rates! @ence it is not eective to consistently reducing ta% rates! >or some countries li:e 4ingapore who is small and open economy that has &een negatively aected &y the world-wide recession" it would &e appropriate #or her to engage in the use o# Feroappreciation stance o# 4ingapore dollars in her attempt to maintain economic growth and low unemployment and 67+! As a small economy" 4ingapore is highly dependent on e%ternal trade #or growth will &e negatively aected &y world-wide recession! As 4ingapore ma
.eneral +rice Level

A4 0

+1 AD1

+0

AD0 /eal ational ncome

 =0 =1 >igure ?* Eect o# depreciation on AD and general price level

 3his will lead to an increase in net e%ports and through a series o#  multiplied income-induced consumption" it will lead to an increase in AD #rom AD0 to AD1! As seen in >igure ?" this will result in a more than proportionate increase in real national income #rom =0 to =1 achieving actual economic growth" and unemployment rate within the economy #alls! 4ince net e%ports contri&utes signicantly to 4ingapore$s .D+" it is appropriate #or 4ingapore to employ such a policy during world-wide recession to also reduce the impact on 67+ &y achieving &alance o# trade surplus in the current account! @owever" in view o# world-wide recession other countries might also engage in currency devaluation or depreciation" cancelling out the #avoura&le eects o# depreciation! >urthermore in the very short run" demand #or goods tend to &e very price inelastic as it ta:es time to change consumption patterns! As a result the 8arshall-Lerner condition may not &e initially satised! >urthermore" in the longer run" price elasticities o# demand and supply o# e%ports and imports are li:ely to &e higher and thus depreciation is more li:ely to &e eective! )ontent Analysis* 4upply side policy

4upply 4ide +olicies are appropriate to develop comparative advantage and develop &etter uality products to &oost e%ports to ensure economic growth!

.+L

A40

A41

+0 +1 AD0

 =0  =1

/eal ational 7utput

>igure H* L/A4 increases >or countries li:e 4ingapore" the glo&al economic landscape is changing" and challenges are pressing! @ence there is a need to nd every opportunity to trans#orm" to emerge stronger in the coming years despite having worldwide recession! 3he government launched programme ndustry 3rans#ormation +rogramme which provided immediate relie# and support amid the current cyclical slowdown" so that domestic rms can continue press on with economic trans#ormation to achieve growth driven &y innovation and higher productivity! Ihen rms engage in technology adoption and innovation it will raise productivity hence productive capacity also increases where L/A4 increase #rom A40 to A42 as seen in gure H! >urthermore" this policy is appropriate as it develops new areas o#  comparative advantage which will lead to an increase in demand #or 4ingapore$s e%ports" which will also lead to an increase e%port revenue" there&y maintain e%port competitiveness &y non-price competitiveness! >or e%ample" the #ood manu#acturing sector where 4ingapore #ood companies have put in place many innovations! 4ome" such as 3an 4eng ee" have used technology to develop a whole range o# products which stay #resh #or longer! 3his ena&led 3an 4eng ee to &e the rst company in 4ingapore to e%port #resh noodles that can &e easily prepared with its special sauce mi%es in Gavours such as La:sa and )urry 8ee! 7thers" such as >oodgnostic" have trans#ormed their &usiness models to enhance &usiness growth through internationalisation and #ood e%ports! 4ingapore$s #ood manu#acturers &uilt on their innovations and 4ingapore$s trusted reputation #or high uality and sa#e #ood to  urthermore" during worldwide recession" rms might have suered a #all in demand might have considered a&out shutdown instead!

)onclusio n

n view o# the worldwide recession" the policies that are appropriate #or each economies might dier due to degree o# the impact o# the worldwide recession on each economies and the current situation such as e%isting large government decits!