Econs Essay Ans
Essa Post-Mortem Economics J2 - Block Test
"We cal:1not use old Keynesian pump-priming policies of paying unemployed people to dig holes in the ground and fill them up again. Our economy is too open, 54 cents of every $ spent in Singapore leaks abroad through imports, so the multiplier effect of government spending is low" [DPM Lee Hsien Loong)
(a) Distinguish between injections and withdrawals {8]
(b) Explain the effects of government spending ()n an economy. In light of the statement above, evaluate the likely effects ()f an increase in government expenditure on the Singapore economy. {I 7]
Planning your line of attack
Analysis of the given quote; '.
The above quote by DPM Lee focuses on. the c1assic Keynesian cure for unemployment/recession, i.e. pump-priming. Pump-priming means government should initiate expenditure in a recession in order order to create multiplier effect to close any deflationary gaps and eliminate unemployment. The tone and content of his speech suggests that this technique is inapplicable/inappropriate in the Singapore context.
Part (a) focuses on knowledge and comprehension skills of J & W concepts.
The line of attack is straightforward here. Draw out key points of distinction and then carefully explain them.
.
Concept of Js and Ws
Both concepts J and W relate to the circular flow of income
. Definitions: Js are autonomous or. fresh expenditure introduced into the circular flow whereas Ws are leakages or expenditures taken out of the circular flow.
- Explain the circular flow of income.
Illustrate with diagram.
What is meant by the circular flow of income?
. It refers to the creation and circulation of income that arises from the demand and supply of goods and services at the macroeconomic level.
. Firms produced goods and services and household supply factor services.
--------------------------------------------------------------------
oTo Expenditure by each of these sector creates income thaLcirculatesorflow back and
forth between them [..Hence the term "circular"]
oTo . Each sector's expenditure provides the source of income for the other thus financing both the purchase of factors as well as the final output. The magnitude of this flow will be stableso long as J=W. In such a situation,the national income is said to be
in equilibrium.
Give examples of J and W.
State effects of changes in J and W on national income.
Key Distinctions:
-Definition: [J]-Any fresh or autonomous exp introduced into the circular flow of income. [W]-Any leakages or exp taken out of the circular flow of income.
-Forms: [J]- Autonomous Investment; Gov exp; Export earnings. [W]- Savings; Taxes and Import exp.
-Effects on NI: [J]- Expansionary [W]- Contractionary
-Effect on K: [J] Enhance K [W]- Diminished K effecrs
Part{b) There are actually 2 parts to this question.
(i)The first part requires a general theoretical discussion and analysis of the effect of government spending on an economy.
The basic ideas to highlight would be:
. G is an injection of expenditure into the circular tlow and hence produces ex:pansionary effetcs on the economy.
. Explain clearly how this is brought about via the multiplier effect -- changeinY = changeinG x K
61dd.
L.l =L.l x. upport WIt ta es an Iagrams. .
. Besides theyalue/size of K, the multiplier effect is dependent on the levetof excess capaciryilJtheecQnomy. When an economy is in recession, Keynes' contention that an increase in G is necessary to jump start an economy towards the road to recovery. Technically it is meant to close DGs pr deflationary gaps. This approach is sometimes called the "pump-priming" of the economy.
. Explam With the help of diagrams how changes in G can be used to close the DG but may create IGs.
Bonus if included:
. In pump~priming the economy, the Keffect isiWf)ortantto take ifitocofisideratiol1~san over stimulation could result in inflation [i..e. create Igs]. Hence, government need to carefully calculate the k effect in order to "fine~tune"the economy.. An over-injection or overdose of expenditure might closeDGs but createlgs unintentionalfy. Fine-tuning is an exacting process involving a careful calibration of expenditure just to close any existing output gaps without overshooting. In practice, this is not an easy task to accomplish. Support with diagrams/simple numerical example to illustrate "fine-tuning" and the closing of the output gaps.
----------------------------------------------------------------------------
1) According to Keynesian economists, the full employment equilibrium level of national income is just one of the many possible equilibrium levels of national income.
a) Explain the statement given. [13]
b) How would a rise in net exports affect the equilibrium level of national income in your country? [12]
Essay outline
Issue.. Classical economists believe that markets are self- equilibrating at full emploYlnent level of national income. On the other hand, Keynesians believe that aggregate demand deterlnines the equilibrium level of national income and this need not be at full employment.
Explain the two main concepts:
-- equilibrium national income
-- full employment national income
Address the issue: equilibrium can be at full employment lvl but the other equilibrium lvls are also possible. i.e. distinguish between the 2 concepts.
Show the 2 cases where there is equilibrium at full employment
A case where Ye = Yf
A case where Ye > Yf
For the latter case, there exist an inflationary gap. Detailed explanation required for the concept.
------------------------------------------------------------------------------------
. Show any case -- Y E
--What households plan to spend might not be strong enough or sufficiently high enough to enable firms to employ all unused resources to produced the desired output.
--This is the reason why the economy could settle at a level of equilibrium below the full employment level.
--Thus, there is excess capacity and unemployment.
--This idea could be demonstrated by showing a DG or using the AD/ AS diagram. As long as the economy is operating along the Keynesian zone of the AS ('flat' zone) curve, equilibrium output is concurrent with unemployment or excess capacity.
----------------------------------------------------------------------------------------
(b) Answers:
1. Rise in net exports => an increase in INJECTION of fresh autonomous expenditure into the circular flow. Explain the effects with the aid of a graph.
2. The increase in nominal national income will be a multiple of the increase in net exports. This is due to the multiplier effect. Explain in detail with the table and give the formulae.
3. Distinguish between full employment and under full employment situations. Real income will only increase when the economy was originally with some unemployment. Nominal income will always mcrease.
Multiplier value inSingapore which is an open economy model.
. The multiplier effect will depend on the value of the multiplier,k. . k is influenced by the marginal propensity to withdraw and to consume.
. For Singapore, where mpm is very high, the value of k is low. Thus, an increase in the net exports may not increase Y by much.
Level of unemployment in Singapore
. During the height of the Asian Economic crisis, in December 1998, Singapore had an umployment rate of 4.3%. An increase in exports would have increase real national income then.
"We cal:1not use old Keynesian pump-priming policies of paying unemployed people to dig holes in the ground and fill them up again. Our economy is too open, 54 cents of every $ spent in Singapore leaks abroad through imports, so the multiplier effect of government spending is low" [DPM Lee Hsien Loong)
(a) Distinguish between injections and withdrawals {8]
(b) Explain the effects of government spending ()n an economy. In light of the statement above, evaluate the likely effects ()f an increase in government expenditure on the Singapore economy. {I 7]
Planning your line of attack
Analysis of the given quote; '.
The above quote by DPM Lee focuses on. the c1assic Keynesian cure for unemployment/recession, i.e. pump-priming. Pump-priming means government should initiate expenditure in a recession in order order to create multiplier effect to close any deflationary gaps and eliminate unemployment. The tone and content of his speech suggests that this technique is inapplicable/inappropriate in the Singapore context.
Part (a) focuses on knowledge and comprehension skills of J & W concepts.
The line of attack is straightforward here. Draw out key points of distinction and then carefully explain them.
.
Concept of Js and Ws
Both concepts J and W relate to the circular flow of income
. Definitions: Js are autonomous or. fresh expenditure introduced into the circular flow whereas Ws are leakages or expenditures taken out of the circular flow.
- Explain the circular flow of income.
Illustrate with diagram.
What is meant by the circular flow of income?
. It refers to the creation and circulation of income that arises from the demand and supply of goods and services at the macroeconomic level.
. Firms produced goods and services and household supply factor services.
--------------------------------------------------------------------
oTo Expenditure by each of these sector creates income thaLcirculatesorflow back and
forth between them [..Hence the term "circular"]
oTo . Each sector's expenditure provides the source of income for the other thus financing both the purchase of factors as well as the final output. The magnitude of this flow will be stableso long as J=W. In such a situation,the national income is said to be
in equilibrium.
Give examples of J and W.
State effects of changes in J and W on national income.
Key Distinctions:
-Definition: [J]-Any fresh or autonomous exp introduced into the circular flow of income. [W]-Any leakages or exp taken out of the circular flow of income.
-Forms: [J]- Autonomous Investment; Gov exp; Export earnings. [W]- Savings; Taxes and Import exp.
-Effects on NI: [J]- Expansionary [W]- Contractionary
-Effect on K: [J] Enhance K [W]- Diminished K effecrs
Part{b) There are actually 2 parts to this question.
(i)The first part requires a general theoretical discussion and analysis of the effect of government spending on an economy.
The basic ideas to highlight would be:
. G is an injection of expenditure into the circular tlow and hence produces ex:pansionary effetcs on the economy.
. Explain clearly how this is brought about via the multiplier effect -- changeinY = changeinG x K
61dd.
L.l =L.l x. upport WIt ta es an Iagrams. .
. Besides theyalue/size of K, the multiplier effect is dependent on the levetof excess capaciryilJtheecQnomy. When an economy is in recession, Keynes' contention that an increase in G is necessary to jump start an economy towards the road to recovery. Technically it is meant to close DGs pr deflationary gaps. This approach is sometimes called the "pump-priming" of the economy.
. Explam With the help of diagrams how changes in G can be used to close the DG but may create IGs.
Bonus if included:
. In pump~priming the economy, the Keffect isiWf)ortantto take ifitocofisideratiol1~san over stimulation could result in inflation [i..e. create Igs]. Hence, government need to carefully calculate the k effect in order to "fine~tune"the economy.. An over-injection or overdose of expenditure might closeDGs but createlgs unintentionalfy. Fine-tuning is an exacting process involving a careful calibration of expenditure just to close any existing output gaps without overshooting. In practice, this is not an easy task to accomplish. Support with diagrams/simple numerical example to illustrate "fine-tuning" and the closing of the output gaps.
----------------------------------------------------------------------------
1) According to Keynesian economists, the full employment equilibrium level of national income is just one of the many possible equilibrium levels of national income.
a) Explain the statement given. [13]
b) How would a rise in net exports affect the equilibrium level of national income in your country? [12]
Essay outline
Issue.. Classical economists believe that markets are self- equilibrating at full emploYlnent level of national income. On the other hand, Keynesians believe that aggregate demand deterlnines the equilibrium level of national income and this need not be at full employment.
Explain the two main concepts:
-- equilibrium national income
-- full employment national income
Address the issue: equilibrium can be at full employment lvl but the other equilibrium lvls are also possible. i.e. distinguish between the 2 concepts.
Show the 2 cases where there is equilibrium at full employment
A case where Ye = Yf
A case where Ye > Yf
For the latter case, there exist an inflationary gap. Detailed explanation required for the concept.
------------------------------------------------------------------------------------
. Show any case -- Y E
--What households plan to spend might not be strong enough or sufficiently high enough to enable firms to employ all unused resources to produced the desired output.
--This is the reason why the economy could settle at a level of equilibrium below the full employment level.
--Thus, there is excess capacity and unemployment.
--This idea could be demonstrated by showing a DG or using the AD/ AS diagram. As long as the economy is operating along the Keynesian zone of the AS ('flat' zone) curve, equilibrium output is concurrent with unemployment or excess capacity.
----------------------------------------------------------------------------------------
(b) Answers:
1. Rise in net exports => an increase in INJECTION of fresh autonomous expenditure into the circular flow. Explain the effects with the aid of a graph.
2. The increase in nominal national income will be a multiple of the increase in net exports. This is due to the multiplier effect. Explain in detail with the table and give the formulae.
3. Distinguish between full employment and under full employment situations. Real income will only increase when the economy was originally with some unemployment. Nominal income will always mcrease.
Multiplier value inSingapore which is an open economy model.
. The multiplier effect will depend on the value of the multiplier,k. . k is influenced by the marginal propensity to withdraw and to consume.
. For Singapore, where mpm is very high, the value of k is low. Thus, an increase in the net exports may not increase Y by much.
Level of unemployment in Singapore
. During the height of the Asian Economic crisis, in December 1998, Singapore had an umployment rate of 4.3%. An increase in exports would have increase real national income then.
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