2025 H2 Economics Paper 1 Case Study 1: Suggested Answers

Aggregate demand is the sum of consumption, investment, government consumption and net exports: AD = C + I + G + (X minus M).

AD = 304.6 + 142.5 + 111.3 + (minus 1.6) = 556.8 trillion yen.

Net exports equal exports minus imports, so (X minus M) = minus 1.6 and X = 97.4.

Therefore (97.4 minus M) = minus 1.6, which gives M = 97.4 + 1.6 = 99 trillion yen.

Effect on private consumption. Exports are a component of aggregate demand (AD = C + I + G + X minus M). When exports rise, ceteris paribus, AD rises by a multiplied extent through the multiplier effect, raising national output. As firms face greater external demand they expand production and hire more factor inputs such as labour, which reduces unemployment and raises household income. With more workers employed and earning wages, private consumption rises, further reinforcing the rise in AD. The growth in exports therefore indirectly stimulates domestic consumption through its positive effect on employment and income.

However, as export growth slows over the period, the positive spillover to consumption weakens, giving a smaller boost to aggregate demand.

An accepted alternative is the effect on private investment: rising exports make export oriented firms more profitable, raising expected returns and so encouraging more investment to expand capacity, though the slowing of export growth would again temper this. Students should develop any one component.

Under Abenomics the Bank of Japan ran an expansionary monetary policy, lowering interest rates even into negative territory and engaging in large scale quantitative easing.

Lower interest rates reduce the opportunity cost of spending and the cost of borrowing. This encourages households to purchase durable goods such as cars and appliances, raising consumption. At the same time, by the Marginal Efficiency of Investment theory, more investment projects become profitable as borrowing costs fall, raising private investment. Since AD = C + I + G + X minus M, the rise in consumption and investment increases aggregate demand. Through the multiplier effect, real national income and actual output rise from Y0 to Y1. On an AD and AS diagram this is a rightward shift of AD from AD0 to AD1 along a Keynesian aggregate supply curve, with real national income rising.

In the longer run, as firms invest more in capital goods, the economy's productive capacity expands, shifting the long run aggregate supply curve rightward and raising potential output from YF0 to YF1.

Subsidies lowering Japanese production costs. The Japanese government rolled out subsidies to support private sector investment, especially in areas such as renewable energy and industrial upgrading. By lowering production costs, these measures let Japanese firms produce more efficiently and sell at lower prices, making Japan's exports more price competitive. For Singapore, which also competes in high value industries such as electronics and precision engineering, this could erode our relative competitiveness as international buyers are drawn to cheaper Japanese alternatives.

Rising deficits and a weaker yen. Japan's persistent fiscal deficits and rising debt, now exceeding 250 per cent of GDP, could weaken investor confidence and lead to a depreciation of the yen against the Singapore dollar. A weaker yen makes Japanese exports cheaper, which reduces Singapore's price competitiveness in overlapping export markets.