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Changing Price Levels and
Their Impact on Economies
H1 Specimen Paper CSQ2
(Syllabus 8823)
(a)(i) State two factors, other than GDP per head, that are included in the
HDI measure of living standards. [2]
• Life expectancy
• Education level
(a)(ii) How are the rate of inflation, the cost of living and the standard of
living related to each other? [2]
• Rate of inflation measures the rate of change or
increase in the cost of living
• Cost of living is inversely related to the standard of
living
(b)(i) Using Table 2, compare the inflation rates over the period 2010‐2014
between Singapore and the UK. [2]
• Similarity:
• Both experience rising then falling inflation rates
• Difference:
• Inflation in Singapore is more volatile than in the UK
(i.e., begins lower, rises higher and ends lower)
• 0 marks for
• Non‐comparative statement
• Mere regurgitation
(b)(ii) Extract 6 suggests that the USA's central bank's target rate of inflation is 'not
easy to achieve.‘
State one reason why a target rate of inflation might be set, identify two key
features of the data shown in Figure 1, and comment on whether this data support
the suggestion. [5]
• Possible reason (one):
• Make firms' decision‐making easier
• Stabilise wage demands
• 2 key features:
• Inflation rate has been volatile over the period shown (sometimes
above target, sometimes below target)
• As much as over 2 percentage points away from 2.0% in 2009
• Possible comment (one well‐elaborated):
• Yes, seems to support the suggestion, but it is not surprising
• Multitude of factors affect inflation rates (e.g., consumer and
business sentiments) government intervention may not be able
to address all these factors adequately
• Even if government were to recognise immediately the problem
(recognition lag), and promptly implement an appropriate policy
(implementation lag), there is still an effect lag (e.g., from multiplier
process) that may delay the intended impact, by which time other
factors may have changed
(c) Using AD/AS diagrams, explain how shifting educational preferences in
Australia (Extract 7) and a rise in the value of the Singapore dollar against
the Malaysian ringgit (Extract 8) are expected to influence rates of inflation
in Australia and Singapore respectively. [7]
• AD/AS diagrams
• 1 mark for correct labelling
• 1 mark for correct identification of the shifts both scenarios
• “Shifting educational preferences” in Australia
• ↑G (Ext 7), e.g., due to desire for greater levels of education
component of AD ↑AD
• ↑AD ↑GPL ↑ infla on rate in Australia
• “Rise in the value of S$ against M’sian ringgit”
• Cheaper imports of FOPs from Malaysia ↓COP ↑AS
• ↑fPx + ↓dPm assuming MLC holds where PEDx + PEDm >
1 ↓ (X – M) component of AD ↓AD
• ↑AS + ↓AD ↓GPL ↓ inflation rate in Sg
(d) Using Extract 9, explain why some periods of falling consumer prices
might be positive for the growth of average living standards, whereas
others are not. [6]
• “Might be positive”
• Evidence:
• “Lower consumer prices … spur to economic growth”
• Theory:
• Cheaper g/s now if expect future prices to rise buy more now
↑C ↑RNY
• More g/s available for consumption + ↑ income earned ↑ mat SOL
• “Others are not”
• Evidence:
• “Deflationary spiral”
• Theory:
• If expected prices to continue falling save more now to spend later
↓C ↓RNY
• Fewer g/s available for consumption + ↓ income earned (perhaps
even unemployment) ↓ mat SOL
(e) Governments or central banks often use interest rates to manage rising
or falling price levels. Analyse how interest rates can affect the price level,
and discuss briefly whether success is guaranteed. [9]
• i/r can cause reduce the price level
• ↑i/r … ↓C and ↓I ↓AD ↓GPL
• Extent of effect of i/r
• Other factors, e.g., consumer and investor confidence interest‐
elasticity
• Small and open economies e.g., Singapore interest rate‐takers
(Impossible Trinity)
• Conclusion/Evaluation
• Address 'discuss briefly whether success is guaranteed'
• Sample 1:
• Make a stand: don’t know if success if guaranteed
• Justify: in reality, hard to pin down the extent to which i/r affects price
level, given that there are also many other factors to price level, such as…
• Sample 2:
• Make a stand: success not guaranteed
• Justify: regardless of the effectiveness of i/r policy, the infeasibility of i/r in
Sg trumps all other factors, and essentially negates the use of i/r policy
(e) Governments or central banks often use interest rates to manage rising
or falling price levels. Analyse how interest rates can affect the price level,
and discuss briefly whether success is guaranteed. [9]
L2 An answer that explains the relationship between interest rates and 4‐6
inflation thoroughly.
L1 An answer that merely describes the relationship. 1‐3
E One valid point, well‐argued, with an appropriate conclusion 1‐3
(f) "Countries such as Singapore should try to achieve as high a rate of
growth of living standards as possible. " Discuss this view. [12]
• P1: Benefits of growth of living standards
• Greater employment
• Increases in income and wealth
• Poverty reduction
• Advances in technology and healthcare
• Increased consumer choice
• P2: Downsides of such growth
• Environmental damage
• Non‐renewable resource use
• Income distribution
• Impact on other macro‐economic objectives such as low inflation
• Issues of sustainable and inclusive growth, particularly in Sg context
• Conclusion/Evaluation
• Should? Should not? Justify!
• As high a rate as possible? Justify!
• Should instead focus on sustainable and/or inclusive growth
(f) "Countries such as Singapore should try to achieve as high a rate of
growth of living standards as possible. " Discuss this view. [12]
L3 An answer that explains the benefits AND arguments against a high 6‐9
rate of growth of living standards.
L2 An answer that explains either the benefits OR arguments against a 3‐5
high rate of growth of living standards, OR takes a descriptive
approach covering both sides.
L1 A vague, descriptive or list‐like answer on either the benefits of 1‐2
growth OR arguments against growth of living standards.
E One valid point, well‐argued, with an appropriate conclusion 1‐3
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