2017 H2 Economics Paper 1 Case Study 2: Suggested Answers
The case study examines China's economy, drawing on it to test how interest rates affect aggregate demand, the trend in inflation, growth spillovers from a stronger US economy, the transition to a consumer led model, and the effects of an expansionary monetary policy on trading partners.
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A question asking to explain how a fall in interest rates in China would affect China's aggregate demand.
A fall in interest rates reduces the cost of borrowing and lowers the opportunity cost of spending, encouraging consumers to spend more, especially on large ticket items. Since aggregate demand is the sum of consumption, investment, government spending and net exports, this rise in consumption raises aggregate demand.
Lower interest rates also make more investment projects profitable, as shown by the marginal efficiency of investment relationship, since the cost of financing falls. The resulting rise in investment, another component of aggregate demand, reinforces the increase.
Trace the interest rate fall through at least one component of aggregate demand, such as consumption or investment.
A question asking, with reference to the data, to describe the trend in China's rate of inflation between 2011 and 2015.
Between 2011 and 2015 the rate of inflation in China slowed, that is, it decreased over the period.
Prices continued to rise across these years, but the rate at which they rose became smaller. The general price level was still increasing, just at a slower pace.
State that inflation fell, and distinguish a falling rate of inflation from falling prices.
Tests: Inflation
A question asking to explain how a strengthening US economy would affect China's economic growth.
As the US economy strengthens, household incomes there rise, raising demand for goods and services including imports from China. This raises China's net exports, a component of aggregate demand. Aggregate demand shifts rightward, and through the multiplier effect real national income rises by a more than proportionate amount, contributing to higher economic growth.
A stronger US economy may also prompt firms to raise investment, including foreign direct investment into China where many US firms manufacture. This further raises aggregate demand and, by adding to China's capital stock, can shift aggregate supply rightward, raising China's potential growth as well.
Identify the net exports channel and the multiplier effect, with credit for a productive capacity effect via investment.
A question asking to explain the factors that would determine how much China's slowdown would affect another economy.
Dependence on trade for GDP growth. An economy with a higher proportion of its GDP derived from trade, and from exports in particular, is more vulnerable to a change in external demand. A highly trade dependent economy such as Singapore would feel a Chinese slowdown more sharply than a more domestically driven economy.
Dependence on China as a trading partner. The more an economy relies on China as a key export market, the larger the impact of reduced exports to China on its trade balance and growth. Where China is one of an economy's top export markets, a slowdown there has a substantial effect.
Two distinct factors, the trade share of GDP and the reliance on China specifically, each clearly linked to the size of the spillover.
An eight mark discussion of the ways in which China could transform from an export led to a consumer led economy.
- Frame the objective of shifting from export led to consumer led growth and set up the policy levers available.
- Develop a monetary policy route and the channel through which it lifts household consumption.
- Develop a fiscal and structural route that works on the precautionary savings motive.
- Identify the main domestic obstacles that could blunt these policies.
- Distinguish the short run outlook from the long run outlook for the transition.
- Reach an evaluative judgment on how feasible the transition is and over what horizon.
This part is gated. The full model answer with the worked aggregate demand analysis and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Monetary policy, Fiscal policy
A ten mark question asking to assess whether China's adoption of an expansionary monetary policy would benefit its trading partners.
- Set out how an expansionary monetary policy raises aggregate demand in China, with a diagram described in words.
- Qualify the domestic effect with the interest rate elasticity of consumption and investment.
- Trace the channel by which higher Chinese incomes could benefit trading partners through import demand.
- Add the exchange rate consideration and why China's policy framework makes the usual depreciation channel atypical.
- Weigh the conditions under which trading partners gain against those under which they do not.
- Reach an evaluative judgment on whether trading partners benefit, and on what it depends.
This part is gated. The full model answer with the worked aggregate demand analysis and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Monetary policy, Exchange rate policy
Questions students ask
Where can I get the full worked answers to the 2017 H2 Economics paper 1 case study 2?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2017 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How are these case study suggested answers structured?
The lower mark parts are answered in full. The higher mark parts are outlined here, with the full worked answers reserved for the ETG TYS Answers book and the TYS Crashcourse.
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