Suggested Answers of BT2 Revision Package - ASKnLearn

(11) 2011 HCI Prelim H1 Paper Q4Inflationary pressures in Singapore are rising due to higher property and COE prices.Singapore reduced its growth forecast for 2011 as a faltering US economy and theEuropean debt crisis heightened the risks to global expansion.(a) Explain how inflationary pressures are a threat to sustained economic growth andimprovement in living standards. [10](b) Assess the effectiveness of the policy options available to deal with both economicthreats facing the Singapore economy. [15]Suggested answer for 4 (a)IntroductionInflation is the persistent rise in the GPL as measured by the % increase in CPI over time. Unless,inflation is brought under control (i.e. low and stable) it could pose a threat to a country’s economicgrowth and living standards.BodyThesis (1)- Impact on AD and growthFigure 1:Price Level AS AD1 AD Real GDP Y Yf With reference to figure 1, economic growth can be adversely affected if inflationary pressures result inan inward shift of the AD. Assuming the economy is currently operating at the Yf level of output. Ifinflation spins out of control ( i.e. prices soar to a high and unstable levels), AD might be fall due to: