2022 H2 Economics Paper 1 Case Study 1: Suggested Answers
The case study examines the economic problems caused by the Australian drought and the COVID-19 pandemic, drawing on it to test demand and supply analysis, real interest rates, savings and the exchange rate, fiscal and monetary policy, and the choice of exchange rate stance in a global recession.
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A two mark question asking, using a demand and supply diagram, why the price of fresh fruit and vegetables in Australia has risen as a result of the drought.
The drought damaged fruit and vegetable crops, which is a supply shock. On a demand and supply diagram the supply curve shifts leftward from SS0 to SS1, showing a fall in supply.
At the original price there is now a shortage, as quantity demanded exceeds quantity supplied. This shortage puts upward pressure on the price, and as the market clears the price rises from P0 to P1.
A leftward supply shift from the supply shock, the resulting shortage at the old price, and the rise in price from P0 to P1.
Tests: Demand and supply analysis
A two mark question asking, using a demand and supply diagram, why international tourist arrivals into Australia are expected to fall as a result of the bushfires.
The bushfires change the tastes and preferences of international tourists, who now seek to avoid the risks of smoke and fire. On a demand and supply diagram the demand curve shifts leftward from DD0 to DD1, showing a fall in demand for tourism in Australia.
At the original price there is now a surplus, as quantity supplied exceeds quantity demanded. The surplus puts downward pressure on the price, and as the market clears the equilibrium quantity of tourist arrivals falls from Q0 to Q1.
A leftward demand shift from changed tastes, the resulting surplus at the old price, and the fall in equilibrium quantity from Q0 to Q1.
Tests: Demand and supply analysis
A two mark question asking, with reference to the data, for one possible reason for the change in Australia's budget balance from February to June 2020.
Australia's budget balance moved from a surplus in February 2020 to a large deficit by June 2020, mainly because of the COVID-19 pandemic. One reason is the sharp rise in government expenditure over the period, with stimulus packages of around A$70 billion to A$90 billion to cushion the pandemic. This spending far outweighed government revenue, worsening the budget position.
An alternative reason is the pandemic's negative effect on GDP, which reduced tax revenue. As the economy contracted, tax collections fell, further widening the deficit. Students should select any one reason.
One developed reason, either higher government spending or lower tax revenue, linked to the move from surplus to deficit.
Tests: Fiscal policy
A two mark question asking, with reference to Extract 2, why a nominal interest rate of 0.25 per cent in March 2020 would be described as negative in real terms.
The real interest rate is the nominal interest rate minus the rate of inflation. In March 2020 the nominal rate was 0.25 per cent while inflation was 2.2 per cent.
So the real interest rate is 0.25 per cent minus 2.2 per cent, which is about negative 1.95 per cent. Because inflation outpaced the nominal rate, the real return on savings was negative.
State the real rate equals nominal minus inflation and apply it to give a negative figure.
Tests: Inflation
A four mark question on how a negative real interest rate is likely to affect savings by consumers and the exchange rate in Australia.
Effect on savings. A negative real interest rate reduces the opportunity cost of spending and lowers the real return on saving, since inflation erodes the value of savings faster than interest accrues. Saving becomes less attractive, so consumers tend to save less and spend more.
Effect on the exchange rate. A negative real interest rate encourages hot money outflows as investors seek higher returns abroad. This raises the supply of Australian dollars on the foreign exchange market, and the supply curve shifts rightward from SS0 to SS1, so the price of the Australian dollar falls from P0 to P1, a depreciation. An alternative channel is that as consumers save less and spend more, including on imports, demand for foreign currency rises and the supply of Australian dollars increases, also causing the currency to depreciate.
Link the negative real rate to lower saving, and to a hot money outflow that raises the supply of the currency and causes depreciation.
Tests: Exchange rate policy, Inflation
An eight mark discussion of whether, given the weakening of Singapore's exchange rate, a stronger exchange rate would be of overall benefit to Singapore when the global economy is in deep recession.
- Set up the case for the existing weaker stance: trace how a weaker currency works through export competitiveness and the relevant aggregate demand component.
- Build the case for a stronger currency through its effect on imported costs and on the price level, identifying which inflation channels it targets.
- Bring in the import dependence of production as the tension that complicates a weaker currency.
- Weigh the two stances against the deep global recession condition, considering how likely inflation is in that setting.
- Reach an evaluative judgment on the appropriate stance and state what it is contingent on.
This part is gated. The full model answer with the worked ad and as analysis and the evaluative judgment, 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.
A ten mark discussion of whether fiscal policy is the most effective way to bring unemployment down in Australia.
- Identify the nature of the unemployment in the case and frame the question around how well each policy addresses that cause.
- Build the case for expansionary fiscal policy through its effect on aggregate demand and the type of unemployment it targets.
- Set out the limitations of fiscal policy for this context, including the constraints flagged in the data.
- Introduce at least one alternative policy and reason through why it may be constrained here.
- Compare the policies on effectiveness and conclude with a supported judgment, including the role of a policy mix.
This part is gated. The full model answer with the worked ad and as analysis 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: Fiscal policy, Unemployment
Questions students ask
Where can I get the full worked answers to the 2022 H2 Economics paper 1 case study 1?
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 2022 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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