2023 H2 Economics Paper 2 Essay 4: 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 how an appreciation of the exchange rate might affect aggregate demand and aggregate supply, then asks whether management of the exchange rate is the most appropriate way of controlling inflation in Singapore.
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Explain how an appreciation of the exchange rate might affect aggregate demand and aggregate supply in an economy. [10]
Aggregate demand (AD) is the total expenditure on an economy's goods and services at different price levels, and aggregate supply is the total output producers are willing and able to supply at a given price level. The exchange rate is the price of one currency in terms of another, and an appreciation is a rise in the value of the domestic currency relative to foreign currencies.
Effect on aggregate demand. When the domestic currency strengthens, imports become cheaper, as fewer units of domestic currency buy the same foreign currency, raising import expenditure. At the same time exports become more expensive to foreign buyers, reducing the demand for exports. Since AD equals C plus I plus G plus (X minus M), an appreciation typically lowers net exports as exports fall and imports rise, reducing AD and shifting the AD curve leftward. However, for a country that mainly exports goods with price inelastic demand, such as oil, the quantity of exports may fall less than proportionately, so export revenue could rise. If that increase outweighs the rise in import expenditure, net exports and AD could instead increase.
Effect on aggregate supply. An appreciation also affects short run aggregate supply (SRAS), especially in economies reliant on imported inputs. A stronger currency makes imported raw materials and intermediate goods cheaper, lowering firms' production costs. For an import dependent economy like Singapore, this fall in input costs raises SRAS, shifting the SRAS curve rightward.
Overall, an appreciation generally reduces AD through weaker net exports, though the effect varies with elasticity, while it can raise SRAS by lowering imported input costs, so the net impact depends on a country's trade structure and the elasticity of demand for its exports and imports.
Work the appreciation through net exports for AD, qualify with export elasticity, and through imported input costs for SRAS.
Discuss whether management of the exchange rate is the most appropriate way of controlling inflation in Singapore. [15]
- Set out why a small open economy with free capital mobility manages the exchange rate rather than interest rates.
- Develop why exchange rate management is appropriate, through the channels by which a stronger currency reduces inflation.
- Identify the trade offs and the types of inflation the policy is less suited to address.
- Introduce complementary supply side or structural measures and their mechanisms.
- Weigh exchange rate policy against the complements across the relevant sources of inflation.
- Reach an evaluative conclusion on whether it is the most appropriate way to control inflation for the economy in question.
This part is gated. The full model answer with the worked ad and as analysis and the policy 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: MAS monetary policy, Inflation
Questions students ask
Where can I get the full worked answers to the 2023 H2 Economics paper 2 essay 4?
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 2023 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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