2020 H2 Economics Paper 2 Essay 6: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains one demand-side cause and one supply-side cause of price deflation for an economy such as Singapore or Japan, then asks whether deflation or inflation is more damaging for an economy.
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Explain one possible demand-side cause and one possible supply-side cause of price deflation for an economy such as that of Singapore or Japan.
Price deflation, a general fall in the price level, can arise from both demand-side and supply-side causes, as seen in economies such as Singapore and Japan.
Demand-side cause. Deflation can result from a fall in aggregate demand. If consumers anticipate lower prices in the future, they delay purchases in expectation of even lower prices, a behaviour that was pronounced during Japan's persistent deflationary trend. If consumers are also pessimistic about the economy, perhaps over job security or wage stagnation, they reduce consumption, lowering overall aggregate demand. A fall in consumption shifts the AD curve leftward from AD0 to AD1. Assuming the economy operates near full employment, the general price level falls from P0 to P1, causing deflation.
Supply-side cause. Deflation can also stem from an increase in short run aggregate supply. For an import-dependent country like Singapore, a major influence on SRAS is the cost of imported raw materials, especially oil and commodities. When global commodity and oil prices fall, as they did between 2014 and 2016, the cost of these imported inputs falls, lowering firms' cost of production. This raises short run aggregate supply, shown by a rightward shift of the SRAS curve from AS0 to AS1. Without a corresponding rise in demand, the general price level falls from P0 to P1, causing deflation.
In summary, deflation in such economies can be attributed to demand-side factors, like a pessimistic consumer outlook reducing consumption, and supply-side factors, like falling global prices for key imports such as oil and commodities.
Give one clear demand-side cause via a leftward AD shift and one supply-side cause via a rightward SRAS shift, each ending in a lower price level.
Tests: Aggregate demand and supply, Inflation
Discuss whether deflation or inflation is more damaging for an economy.
- Frame the comparison as depending on the nature, cause and extent of each phenomenon.
- Set out the channels through which inflation damages the economy.
- Set out the channels through which deflation damages the economy.
- Compare the two using contrasting real-world experiences to show that context decides the answer.
- Reach an evaluative conclusion that the relative damage depends on the causes and the economic structure.
This part is gated. The full model answer comparing the damage from inflation and deflation and the conclusion, 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: Inflation, Aggregate demand and supply
Questions students ask
Where can I get the full worked answers to the 2020 H2 Economics paper 2 essay 6?
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 2020 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 should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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