Suggested Answers of BT2 Revision Package - ASKnLearn

(1) Loss in export competitiveness e.g. soaring wage rates and other business costs like rentals;utility and transportation costs pushed up the cost of production for exporters. Foreigners mightshun such expensive exports causing demand to slump and export earnings to fall. Ceterisparibus, AD would fall, if the outcome is to cause M >X or NX to become negative.(2) Loss of investors’ confidence. In an economy that is plagued by soaring inflation e.g.hyperinflation, it is difficult for businesses to predict the future returns from their investments. Forexample, when prices and costs are spiraling out of control, it is difficult for businesses to assessthe risks and benefits of investing in new production capacity e.g. buy new machines; tools andequipments or build new factories. Due to uncertainties and risks businesses are likely to holdback investments. Hence the I component of AD falls.In short, high and unstable inflation is likely to hit X and I causing AD to fall and economic growth toslow-down or even contract from Yf to Y. (Refer to figure 1).Thesis (2) - Impact on ASFigure 2:Price level LRAS SRAS1 SRAS AD Y Yf Real Y With reference to figure 2:Cost-push inflationary pressures can also derail growth by causing the AS curve to shift leftwards.How?Higher rental and transport costs => Increases cost of production to businesses/producers. Businessespassed on the higher costs to consumers by raising the prices of their output/product. AS curve shiftsupwards…. Real GDP slows or even falls from Yf to Y as shown in figure 2.