Monday, June 11, 2018

Key Concepts That Are Frequently Being Tested in Paper 3 of Economics 9708/32 (CIE) (CAIE)

Popular economic concepts tested in Paper 3:
1. Outcomes due to unanticipated/ unexpected increase in money supply (according to Monetarist)
a. Unemployment will fall in the short-run. In the long-run, it will return to its initial level. Expansionary demand-side policies will not be effective in addressing supply-side unemployment
b. Price level will continue to increase, both short-run and long-run
c. SRPCs (short-run Phillips curves) will continue to shift upwards and to the right due to expectation of higher inflation rates by workers

2. Allocative efficiency/ overall economic welfare can be improved if one person can be made better-off without making another person worse-off (Pareto efficiency criterion). This will involve a horizontal or vertical movement between two points

3. Under monopsony labour market:
a. The dominant employer will use MCL = MRPL to determine the profit-maximising number of workers to be hired. The pay will be based on the ACL which is also the supply curve of labour

b. The pay that these workers get is even lower than what they would have otherwise received under competitive equilibrium of MRPL = ACL or DL = SL

c. An intervention by trade union will increase their current pay close to the competitive equilibrium. There will also be an increase in the number of workers hired

4. An increase in savings is crucial as banks will have more funds to generate lending. This will boost an increase in AD as well as LRAS, especially in the context of developing countries

5. When revenue is maximised:
a. MR = 0 (gradient at the peak of TR curve would be zero)

b. PED = -1

c. Profit would be lower than the one under MC = MR

6. Economies of scale corresponds with INCREASING returns to scale (% of change in output > % of change in input). As output increases faster than input, costs can be spread over a large number of output, thereby reducing unit costs. By contrast, diseconomies of scale corresponds with DECREASING returns to scale (% of change in input > % of change in output). As input increases faster than output, costs will be spread over a smaller number of output and this results in rising costs per unit. Please take note that you may be asked to CALCULATE % of change of both. It is PERCENTAGE of CHANGE NOT DIFFERENCE

7. Government incurring a budget/ fiscal deficit:
a. Is also equivalent to expansionary/ reflationary fiscal policy

b. Money supply will increase if the borrowing is from central bank or overseas

c. Money supply may not increase/ stays unchanged if the borrowing is from domestic banks/ non-banks private sector/ members of the public. This is believed to be related to crowding-out effect e.g. banks have less money to lend, firms have less money to invest and households have less to spend. It also implies more competition for money which causes interest rates to increase. Since cost of financing increases, both firms and households cut down their spending. This results in 'neutralising' effect of aggregate demand

8. Expansionary monetary policy:
a. The most common ones are cut in interest rates and an increase in money supply

b. It also includes relaxation of lending policies as well reduction in cash ratio/ reserve requirement so that more loans/ credit can be created

c. May also include currency devaluations 

d. Happens when the central bank buys bonds/ securities/ treasury bills from banks. This will result in an increase in money supply. Also known as OMO (open market operation)

9. Labour mobility can be increased if national minimum wage is abolished. Reason is, there is no point moving from impoverished areas with high unemployment into prosperous areas with job opportunities. After all, the wage is the same and yet costs of living are higher. Unemployed people are better-off staying at where they are now despite vacancies are hard to come about

10. Kuznet curve:
a. Initially, as income rises, quality of environment degrades. However, beyond certain level, as income continues to increase, quality of environment will improve. This is commonly seen everywhere in developed nations and even emerging economies like China and Malaysia. When people have lower income, they care less about the environment. Once people have reached certain level of income they would want to care for the environment they live in

b. Another Kuznet curve shows how income inequality changes over time as income rises. Initially as income rises, income inequality will worsen. However, after reaching certain level of income, income distribution will improve. This model is true considering the circumstance that one sees in developed nations. Reason being, income tax rates will become more progressive while benefits more generous

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