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 3rd qtr of 2007 and
then increased at a decreasing rate till 2nd qtr of 2008. From the 2nd qtr to the
end of 2008 house prices fell.

(b) Explain the likely value of the price elasticity of supply of houses in Singapore. [2]

The supply of houses is likely to be price inelastic. PES is less than 1. (1

mark)
With a rise in the house prices due to the increase in demand for houses, the
quantity of houses supplied is not able to increase readily as new projects take
at least 3 years to complete and new and ready properties may not be
released by developers who may hold back launches as they expect prices to
increase further in the near future.
(2 marks)

(c) With the help of a diagram, explain how high global fuel and commodity prices
resulted in inflationary pressures in the country. [4]

High global fuel and commodity prices high cost of production since
Singapore is reliant on imported fuels and commodities in its production
process  AS increases  AS shifts to the left  AD exceeds AS , hence
exerting upward pressure on the general price level  cost push inflation.

AD-AS diagram to show cost push inflation is required

Diagram ---1 mark
Explanation --- 3 marks

(d) Using economic analysis, explain how inflationary pressure and the financial
crisis have affected house prices. [6]

Inflation rate increased due to rising global fuel and commodity prices cost
of production increased  AS shifts to the left
The global financial crisis resulted in world wide fall in income  Xs fell  AD
shifts down

The combined impact of the shifts in the AS and AD  economy contracts.

This caused workers to be retrenched and unemployment rate rose.

The rise in the unemployed numbers would mean that some people would not
be able to meet their mortgage repayments and would have their houses
repossessed  supply of houses increased in the market.

This increase in supply coupled with low demand as people are less confident

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 of their ability to pay up their housing loans or to meet mortgage
requirements house prices fell.

Explanation of inflationary pressure and global financial crisis on the economy

and relate to demand for and supply of houses --- 4 marks
Analysis of changes in demand and supply and the impact on house prices ---
2 marks

(e) Using the information provided in Extract 1, explain the impact of changes in [5]
house prices on the macro economy.

Houses are a form of wealth for most people. A change in house prices has a
significant impact on consumer wealth and consumer confidence hence
consumer spending is affected.

Falling house prices  a decline in wealth  people become less confident

about borrowing and spending  C falls  AD falls and the economy
weakens with national income and employment level falling.

Rising house prices allow home owners to remortgage their houses and have
cash for spending. Also, home owners would feel richer when house prices
soar since houses are the biggest form of wealth for them. Hence C
increases stimulating the economy  national income and employment level
would increase.

(f) (i) Explain one measure the Singapore government has taken to boost the
housing market. [3]

A relaxation of foreign ownership rules on apartments would make it

easier for the significant number of expatriates working in Singapore and
foreigners to purchase houses  demand for houses increases
quantity transacted increases and house prices increase significantly
since supply of houses is in general price inelastic.

Or

An increase of the maximum loan-to-value ratio from 80% to 90% 

people can obtain more loans  demand for houses increases 
quantity transacted increases and house prices increase significantly
since supply of houses is price inelastic.

Or

A reduction of cash down payments from 10% to 5% for home purchase

 demand for houses increases  quantity transacted in the market
increases and house prices increase significantly since supply of houses
is price inelastic.

Max 2 marks if PES is not mentioned.

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(ii) With reference to the data provided where appropriate, and the
microeconomic goals of the government, discuss whether there is
justification for intervention in the housing market. [8]

Microeconomic goals of the government:

-allocative efficiency
-equity

Without government intervention, the price of houses and the quantity of

houses transacted in the free market are determined entirely by the
market forces of demand and supply. The market-clearing quantity would
not be at the socially optimal level as the free market will not take into
consideration the positive externalities (social cohesion and social
stability) of homeownership, resulting in under-consumption and hence
allocative inefficiency.

Social marginal benefit (SMB) of housing exceeds the private marginal

benefit (PMB) and the quantity transacted in the market is lower than the
socially optimum. Unless there is some form of government intervention,
there will be under-consumption, resulting in welfare loss to society.
[Explain with the help of a diagram to show market failure --- under-
consumption of housing]

To ensure a higher level of home ownership, house prices must be made

affordable. All governments are obliged to provide public housing through
direct intervention in supplying housing and making them affordable to
the lower income group, or through indirect intervention in the form of
subsidies, tax policies and control of land supply.

Most governments intervene in the housing market by building and

selling new houses/flats and pricing them at affordable rates usually at a
significant discount off the market value of similar dwellings. This helps
raise homeownership.

To further improve affordability, subsidies like housing grants and

subsidized housing loans, and tax policies like reduction of capital gains
and property taxes would make homeownership attractive and hence
raise PMB upwards towards SMB prices fall and the quantity
transacted in the market would increase and welfare loss would then be
reduced.

Since price of public housing is below the market price, demand will
exceed supply. There is therefore need to impose restrictions like ceilings
on household incomes for eligibility to purchase and criteria for subsidies
in order to better direct the assistance to the lower income group.

In the resale and private property markets, it would be more efficient to

leave market forces to determine the quantity and price of houses.

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However, a boom may result in high house prices and threaten the
formation of an asset bubble in the country. Hence, there is a need for
the government to keep watch over house prices and intervene to control
the rapid increase in prices. Measures such as tightening loans and
releasing more land to build houses would decrease the demand and
increase the supply of houses respectively preventing house prices from
soaring to reach heights which would be beyond what the first-time
buyers can afford. Soaring house prices may lead to overheating in the
economy and threaten stability.

Through home ownership, people in the country acquire a store of value

which they can encash in times of need. Home ownership also protects
the lower income group from rising rents in times of inflation. This is
especially helpful to the lower income group, providing some form of
financial security.

House value appreciates with the country’s growth, the benefits of growth
percolate to the lower income groups as well. This contributes equity and
social stability.

While government intervention is needed and justified to ensure that

home ownership is at the socially optimal level to maximize society’s
welfare and that wealth is distributed to the lower income group as well,
there is opportunity cost to be considered. There may be funding problem
with the large amount of subsidies offered and the funds would be
directed away from other development projects which can raise
productive capacity and contribute to the economy’s growth. The right
amount of subsidies to increase the consumption of housing to the
optimal level is often difficult to ascertain. There is also the concern that
achieving a high level of home ownership might mean that people are
committing large proportion of their savings to housing resulting in the
possibility of insufficient liquidity for old age needs.

Therefore, regular review of government housing policies to ensure that

costs and benefits of government intervention must be appropriately
balanced. It is important for the government to watch the housing market
and to act judiciously so as not to allow booms and busts in the market
as instability in this market can affect the economy and the various
income groups.
L1 Statements of microeconomic goals and descriptive 1-3
answer on either the general reasons for or the measures
of government intervention without directly addressing the
question
L2 Clear explanation of market failure and rationale for 4-6
government intervention to achieve allocative efficiency
and equity. Some attempt to evaluate government actions.
L3 Thorough explanation on government intervention in the 7-8
housing market to achieve allocative efficiency and equity

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 and evaluation of the actions. Answer arrives at a clear
and reasoned conclusion.
Question 2
(a) (i) Compare US trade balances with China and with the world for the
period 2005 to 2008. [2]

US trade balances with China and with the world were in deficit.
The trade deficit with China increased throughout the period while the
trade deficit with the world increased from 2005 to 2006 and then
improved from 2007 to 2008.

1 mark for each comparative statement

(ii) How does the value of the Chinese currency in 2008 compare to its
value in 2000? [1]

The Chinese currency appreciated against the US dollar.

(iii) Based on the data on US trade, what evidence is there to suggest that
a revaluation of the Chinese currency against the US dollar may not
correct US trade imbalance? [3]

With a revaluation of the yuan, China’s exports would become more

expensive in the US while imports from US would be cheaper in China.

The value of US’s net exports will increase if the Marshall-Lerner

condition (i.e. sum of price elasticities of demand for exports and
imports is greater than 1), hence reducing US trade deficit with China.

However, the yuan appreciated from 2005 onwards but US trade

balance with China remained in deficit and the deficit continued to
increase.

Moreover, given that exports to China is a small proportion of her total

exports and imports from China constitutes an even smaller proportion
of her total imports, even if there is improvement in her trade balance
with China, it would not correct her balance of trade position.

(b) Explain how the trend in China’s foreign reserves is affected by the changes
in the indicators as shown in Table 3. [4]

China’s foreign reserves rose over the period 2000 to 2008.

The surplus in the current account grew by more than 300%. This resulted in
significant currency flow and pushed up the reserves.
From 2000 to 2004, the external value of the yuan in US$ had remained at
8.28, suggesting that China had been offering the yuan to buy up US dollars,
resulting therefore in growth of foreign reserves.

2 marks for giving a brief explanation of how a change in each indicator can
cause the reserves to increase.

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(c) Discuss whether the US government’s decision to boost tariffs on Chinese-
made tyres can be justified in terms of economic theory. [8]

According to the Law of Comparative Advantage, a country should

specialize and export the good/service that it has a lower opportunity cost in
producing and imports the good that it has a relatively higher opportunity
cost in producing than another country. This will result in increase in world
output and the countries engaging in trade will also mutually benefit as both
countries are able to consume beyond their production possibility curves.
Hence welfare is maximized if countries specialize in the production of the
goods/services in which they have the lowest opportunity cost. This is the
basis of the argument in favour of free trade.

The call to increase tariffs on Chinese tyres is an attempt on the part of the
US to correct the trade deficit with China. There is claim that the
undervaluation of the yuan has made Chinese goods much cheaper in the
US  large influx of imports from China  trade deficit with China. In
addition, as US producers find it difficult to compete with the cheaper
Chinese product, there would be lay offs  unemployment in the US.

The imposition of higher tariffs on Chinese tyres would raise the price of
imported Chinese tyres in the US, resulting in reduced amount of Chinese
tyres imported into US  improves US trade deficit with China. Also, as
domestic producers are protected from competition from China  domestic
production is stimulated  jobs are not just saved but more jobs can be
created.

Evaluation of the tariff proposal:

• The decision to increase tariffs may not be very effective in correcting
US trade deficit if the demand for Chinese tyres is price inelastic.
• US firms producing tyres in China and sell tyres back to US will be
adversely affected  earnings from such overseas investment fall,
affecting US’s current account.
• Car manufacturing industry would experience higher cost of
production due to increased domestic price of tyres after the
imposition of tariff reduces supply of tyres.
• US consumers lose out as they have to pay higher prices on tyres
whether imported from China or domestically producedwelfare
loss.
• Protecting the domestic tyre industry may result in complacency and
inefficiency.
• Retaliation would result in a contraction in trade (China threatens to
cut imports of US auto parts and chicken wings) no one wins as
trade contracts  AD in both US and China would fall 
unemployment in both countries

US’s decision would hurt not just China but the US economy. It is certainly
not justified especially if China has the comparative advantage in producing

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 tyres. If the US cannot produce tyres at a lower opportunity cost than China,
then the tariff would result in inefficient use of resources in the US leading to
higher opportunity costs.
L1 Sketchy answer with some reasons why tariffs are imposed 1-3
and advantages and disadvantages of protectionism with
hardly any reference to the context
L2 Clear explanation of the reasons behind the imposition of 4-6
tariffs and the advantages and disadvantages with reference
to the context
L3 Discussion of the advantages and disadvantages of the tariff 7-8
proposal with application and reference to the context and
the relevant economic theory

(d) (i) Explain the relationship between China’s current account balance and
its economic growth rate as observed in Table 3. [4]

There is in general a direct relationship between China’s current

account balance and its economic growth rates. (I mark)

Explanation for the direct relationship:

When the surplus in the current account increases, it is likely that there
is a surplus in the trade in goods and services account (trade in goods
and services being the largest component in the current account)
value of net exports increases AD increases  national income
increases by a multiple via the multiplier. Hence when there is an
improvement in the current account, the growth rate increases and
vice versa. (3 marks)

(ii) With reference to the data where appropriate, assess whether the
increase in China’s GDP is primarily due to its rising exports to the
rest of the world. [8]

Increase in China’s GDP is dependent on exporting to the rest of the

world
• Trade is an important factor contributing to China’s growth
-China was the world’s second largest merchandise exporter in
2008
-large inflow of FDI in China resulted in increased trade
conducted by these foreign-invested firms  export-led growth
-when American consumer spending fell  Chinese exports
fell as US is a major importer of Chinese goods AD fell 
real GDP growth fell

Other important factors contribute to the increase in China’s GDP

• FDI flows is a major factor contributing to the increase in
China’s GDP
-foreign firms set up in China  AD increases  actual growth
-foreign firms bring in technology, expertise and knowledge 
increase productive capacity in China  AS shifts to the right

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 LR potential growth

• When the global economic crisis occurred and exports and

FDIs decreased  Government policies were in place and
were critical in preventing a contraction in the GDP

• Government policies like increased spending on infrastructural

development  AD increases in the SR resulting in actual
growth. Infrastructural development also enhances productive
capacity and brings about growth in the LR

• Easy monetary policy  boost private spending  C & I

increase  AD increases  national income increases by a
multiple

• Assistance provided to various industries helps in enhancing

efficiency and productivity resulting in increased output 
industries continue to thrive

• More recently, the growing middle class in China has helped

developed a larger domestic consumer market. This is
especially significant in making China less dependent on
external demand to grow her economy

While exporting to the rest of the world contributes significantly to the

increase in China’s GDP , other factors also played a part in the
growth in its GDP. Given that heavy reliance on external demand
would increase the economy’s vulnerability and subject it to greater
instability, China is increasingly aware of the need to stimulate
domestic demand to achieve increase in her GDP.

L1 Mere listing or brief explanation of factors contributing 1-3

to the increase in China’s GDP with hardly any
reference to the case.
L2 Explanation of some factors contributing to the 4-6
increase in China’s GDP with little evaluative
comments and insufficient reference to the case.
L3 Clear explanation and discussion of the factors 7-8
contributing to the increase in China’s GDP with
reference to the information in the case, and arriving at
a reasoned conclusion.

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Question 3
Despite an average growth rate of nearly 8 per cent from 2004 to 2007, Singapore
was the first East Asian country to fall into a recession from the current global
economic crisis after July 2008.
Sandre Thangavelu, January 5th 2009

Explain how the current global economic crisis has caused the Singapore
economy to fall into a recession and assess the effectiveness of the measures
adopted by the government in solving the problem. (25)

Analysis of Question:
Command words: explain – clear explanation of how the global crisis caused
recession, assess – analyse and judge the various measures used to solve the
recession problem.
Key words: global economic crisis, recession, policy measures
Context: Singapore economy

Introduction: Explain the meaning of recession and the impact on Singapore given
the characteristics of the Singapore’s economy.
A recession occurs when there is a fall in an economy’s real GDP for at least 2
consecutive quarter period. Singapore being a very small and open economy which is
highly dependent on trade, suffered adversely from the global economic crisis which
started in the USA. This global economic crisis has led to a fall in Singapore’s real GDP
and caused a recession in Singapore in 2009.

Development
•Explain how the global crisis caused a fall in Singapore’s export.
-Global slowdown led to a fall in demand for Singapore’s export, which is an important
component of AD.
-as world income fell, world’s demand for consumer goods fell. This led to a fall in
demand for Singapore’s electronic consumer goods as well as a fall in demand for
electronic components such as integrated circuits / disk drives etc which are the main
manufacturing exports of Singapore.
-in addition, services sectors are also affected,eg. tourism, financial, port services as the
purchasing power fell.
-thus, when fall in export revenue > fall in import expenditure, net export will fall, ceteris
paribus, AD will fall.

•Explain how global crisis led to a fall in AD and national income

- Due to fall in export revenue, firms profit fell and business sentiments were adversely
affected. This led to a fall in investment spending which is another component of AD.
Thus the overall fall in AD due to a fall in export and investment caused a multiple fall in
national output and income through the multiplier process. Thus, as real national income
falls, the economy experienced a recession . ( Explain using AD/AS diagram)

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Global recession has adverse effect on the Singapore economy, given our heavy
reliance on trade and FDI. This leads to negative economic growth in Singapore,
affecting the standard of living of the citizens and worsened the BOP. Thus, the govt
used various policies to mitigate the negative impact caused by the global slowdown.

•Explain the various policies used by the Singapore government to reduce the
negative impact of recession.
-Singapore govt has implemented various policies to reduce the negative impact of the
global recession on Singapore’s economy. Govt uses both expansionary fiscal policy,
exchange rate policy as well as supply-side policies to address the problems.

i) Explain the use of expansionary fiscal policy to mitigate the impact of recession
Expansionary fiscal policy is one of the important policies adopted to stimulate AD to
avert the recession. Govt spending increased and taxes were reduced.
Eg. govt spending on infrastructure, health care and education ($4.4b), govt spending of
$4.5b on job credit scheme to help firms stay afloat by giving cash grants to retain jobs
etc.
Eg. reduction in corporate tax rate from 18% to 17%, tax rebates to households.
When govt spending increases, ceteris paribus, AD will rise as govt spending is a
component of AD.
When taxes such as corporate tax was reduced, it provided the incentive for firms to
increase investment spending, which is a component of AD as lowering of corporate tax
increased the after-tax profits of firms. Tax rebates given to households increase their
disposable income which help to encourage households to spend on consumer goods.
Thus with a rise in govt spending and increase in investment and consumption spending,
AD will rise. Higher spending in the economy will lead to a fall in firms stock and this
indicates a need for firms to increase production and thus through the multiplier process,
national income and output will rise a multiple times. Thus, the rise in national income
will reduce the problem of recession caused by the fall in external demand.

Evaluation:
-poor sentiments of consumers and firms=> lower corporate tax rates and tax rebates
may not boost C and I spending.
-job credit scheme aims at retaining jobs during the downturn by reducing firms’ labour
cost. However, this scheme may not be able to keep jobs if firm incur losses and labour
cost is only a small proportion of total cost of production.
-given Singapore’s high dependence on imports and high savings, the multiplier size is
very small. Hence, any increase in AD through expansionary FP has limited impact on
increasing national income and employment.
-given that Singapore is highly dependent on exports, expansionary FP is used only as a
buffer to reduce the severity of the recession but is not a measure to get Singapore out
of the recession.

ii) Exchange rate policy: maintain a neutral stance to maintain price

competitiveness of exports.
Evaluation:
-price competitiveness of exports may not be sufficient to increase demand for
Singapore’s exports given the fall in purchasing power of foreign consumers due to the
recession.

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- weaker S$ => higher prices of imports and may cause imported inflation thru higher
cost of production given that some of our exports have high import content.

iii)Supply side policies to improve Singapore’s competitiveness in the long run

- Encourage labour to upgrade through training during downturn so that when the
world economy recovers and dd for Singapore’s exports picks up, we are able
compete in terms of price and non-price competitiveness. Eg. Spur

- Govt spending on R&D / innovations => increase our productive capacity in the LR

- Govt spending on infrastructure

Evaluation:

- Supply side policies used by the Singapore govt is aimed at improving the long run
capabilities of the economy during the downturn. Through supply-side measures,
our economy’s competitiveness is enhanced so that when the global economy picks
up and the external demand rises, the economy is able to produce high quality
exports to meet the rising demand.

iv) Trade policy to diversify and expand export market, eg. Signing more FTAs,
less reliance on US and EU markets.
Conclusion: Given our high dependence on external demand, the global slowdown has
affected us quite badly. The policies adopted have helped to reduce the negative
impact of the recession on the economy. However, the recovery from the recession has
to depend on the recovery of the global demand and these policies can only help to
reduce the severity of the recession in the short run and also help to improve our
productive capacity in the long run to meet the eventual rise in global demand when the
world economy recovers.

Level 1: 1-8m Answer merely states the impact of a fall in national income and
gives brief mention of some policies to solve the recession
problem without analysis.
Level 2: 9-14m Answer explains how global crisis affected Singapore’s exports
and investment and analyses the subsequent impact on national
income using AD/AS analysis.
Answer analyses at least 2 policies used by the Singapore
government to address the economic slowdown.
Level 3: 15-21m Answer analyses thoroughly how global crisis affected
Singapore’s economy in terms of exports and investment and the
impact on national income with specific reference to Singapore
economy.
Answer analyses and evaluates how demand and supply-side
policy measures were used to address these problems with
specific reference to the Singapore economy.
E1 : 1-2m Able to form some value judgement on the effectiveness of the
policies used to solve the problem.
E2 : 3-4m Able to give judgement on the effectiveness of the policies used

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 with justifications. eg. FP is necessary to buffer the negative
impact on the economy but the need for supply-side polices as a
long term measure to boost Singapore’s capacity and efficiency
and to meet the rising demand for our exports when the global
economy recovers eventually.

Question 4

Governments around the world aim to achieve macroeconomic objectives of price

stability, full employment, high and sustained economic growth and healthy
balance of payments.

(a) Explain the importance of achieving these macroeconomic objectives.

[10]

(b) Discuss the view that governments are not able to achieve all the objectives
simultaneously.
[15]

Analysis of Question
Command word: Explain – analyse some important benefits of achieving the 4
macroeconomic objectives.
Key concepts: macroeconomic objectives - price stability, full employment, sustained
economic growth and healthy balance of payment.
a)
Introduction: State the 4 macroeconomic objectives
Development
•Explain the benefits of achieving price stability
Price stability provides a conducive environment which is important for production,
investment and savings to take place. With rising inflation, firms can’t project their future
returns easily and thus, discourage investment which is important for economic growth.
With price stability, production and investments are encouraged and this leads to higher
employment and economic growth.
•Explain the benefits of achieving full employment
Achieving full employment or low unemployment helps to ensure that the economy’s
scarce resources are fully utilized so that the economy is able to achieve full
employment output and higher standards of living for its citizens.

•Explain the benefits of achieving economic growth

Economic growth refers to both actual and potential growth. It is an important objective
because with economic growth, there is higher national output which will raise the
standards of living of the citizens. Economic growth also helps to reduce income
inequality in the economy as government has more funds available to assist the poor in
the economy.

•Explain the benefits of achieving healthy balance of payments

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To achieve a healthy balance of payments means that the country enjoy surplus in its
trading with the rest of the world. This objective is important because a healthy BOP
means that the economy is performing well and accumulating foreign reserves which
can be used to ensure the stability and strength of the country’s exchange rate.
Conclusion: All governments aimed to achieve these macro economic objectives as they
bring about benefits to the economy and the citizens.
Level 1: 1-3m Mere stating of some benefits or problems of not achieving
these macroeconomic objectives
Level 2: 4-7m Able to explain the benefits of achieving at least 2-3
objectives. (2 well-explained benefits ---max 6m)
Level 3: 8-10m Able to explain thoroughly the benefits of all the 4 macro
objectives.

b)
Analysis of Question
Command word: Discuss – analyse and evaluate the ability of governments to achieve
the 4 macroeconomic objectives with reference to both short and long run periods.
Key words/concepts: macroeconomic objectives simultaneously

Introduction
Explain the importance of achieving these 4 objectives but recognize that these
objectives may not be achievable, especially in the short run.

Thesis: Objectives are not achievable simultaneously

•Explain the possible conflict between price stability and full employment
To achieve price stability, especially demand-pull inflation, government may need to
adopt contractionary demand side policies which cause a contraction in AD and national
income. Therefore, achieving price stability may result in unemployment.
On the other hand, to achieve full employment, govt may have to use expansionary
demand side policies to stimulate AD and output. If AD rises too much, it may cause
inflationary pressure if the economy’s resources are fully utilized.

•Explain the possible conflict between economic growth and healthy BOP
Higher economic growth results in higher purchasing power of the citizens. This may
cause a rise in consumption of both domestic and foreign goods. Also, high economic
growth may also lead to a rise in imports of inputs. Thus, import expenditure may rise
and ceteris paribus, leads to a worsening of the current account of the BOP.
Thus, there are possible conflicts between the various objectives and governments may
not be able to achieve all the four objectives simultaneously in the short run. The reason
why these objectives could be in conflict with each other could be due to the use of only
one policy to address one macro problem. Eg, to achieve price stability, the use of
contractionary FP or MP leads to a contraction in AD and national output and
employment. Therefore, price stability is achieved at the expense of full employment.

Anti-thesis: Objectives are not in conflict / objectives can be achieved

simultaneously in the LR

•Explain the use of supply-side policies to achieve the 4 objectives simultaneously

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- In the long run, the use of more than one policy, especially with the use of supply side
policies, can help the govt to achieve all the 4 macroeconomic objectives
simultaneously.
- Explain how the use of supply-side policies help to increase productive capacity and
LRAS.
Eg. govt’ subsidies on research and development => improve production processes,
reduce cost of production => improve efficiency and reduce costs of production
Eg. govt’s subsidies on training and education=>improve the skills and quality of labour
force, makes labour market more flexible => reduce structural unemployment and
improve labour productivity.
Eg. govt’s lowering of corporate tax=> incentives for investment=> increase in capital
accumulation, higher level of technology, improve efficiency
-Supply-side policies thus improve productive capacity of the economy causing a
rightward shift in economy’s AS in the LR. As the economy’s ability to produce g/s
increases, so there is less inflationary pressure even with a rise in AD. This helps to
ensure that the country’s exports are price competitive. Also, supply-side policies which
focus on R&D, help to improve the costs of production and improve the quality of
exports. In the long run, this helps to boost export revenue and improve current account
balance. Stable prices in the economy also help to attract more FDI which helps to
improve capital account and boost actual and potential growth of the economy.

•Explain the need to use demand-side policies together with supply-side policies
to achieve the macroeconomic objectives.
- With the use of also demand –side policies such as expansionary FP and MP to boost
AD, the economy will be able to ensure that the objectives of full employment, price
stability and growth can be achieved in the long run. This is because without a rise in
AD, it is unlikely that the higher productive capacity will be put to use. (Use AD/AS
diagram to explain).
Conclusion+ overall evaluation
Conflicts between macro economic objectives may arise in the short run but in the long
run, with the use of more than one policies, both demand-side and supply-side policies,
can help the economy to achieve the four macro objectives simultaneously.

Level 1: 1-3m Answer merely states some conflicts between the various
macro objectives but is lacking in analysis. No attempt to
explain how in the LR these economic objectives may be
attained without conflicts.
Level 2: 4-7m Answer clearly explains how the pursuit of economic
objectives can lead to conflicts in the SR and how the 4
objectives can be achieved in the LR with the use of supply-
side policies.
Level 3: 8-11m Answer analyses clearly the possible conflicts between
objectives in the SR and explains thoroughly how supply-side
policies can help to achieve all the 4 objectives without any
possible conflicts in the LR.
E1:1-2m Some judgement as to whether the 4 macroeconomic
objectives can be achieved without conflicts.
E2:3-4m Some reasoned judgement that both demand and supply-side
policies are needed to achieve the macroeconomic objectives
without conflicts.

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