RI 2021 MOCK PAPER ANSWER SCHEME

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Raffles Institution 2021 Y6 H1 Mock Examination CSQ1 (2021 ASRJC H1 Prelims adapted) (a) (i) With reference to Figure 1, compare the growth in Vietnam’s domestic passenger air traffic volume with the growth in international passenger air traffic volume. [3] Similarity : Both domestic and international air traffic growth rates are positive. (1) but are decreasing. (1) Difference : Domestic air traffic volume growth was greater than international air traffic volume growth during 2015-2016, but was below international air traffic volume growth from 2016 to 2019. (1) With reference to extract 1, (ii) Using a demand and supply diagram, account for the change in Vietnam’s total air traffic volume and comment whether this trend is likely to persist in the future. [7] With the nation’s GDP going up by 225%, there is an increase in income for the Vietnamese. Given how air travel is a normal good for majority of the working class, the increase in purchasing power will lead to an increase in Demand for air travel from DD0 to DD1. At the current price, there is a shortage. Consumers bid up prices, causing producers of air travel to increase the quantity of flights supplied. The increase in price will also cause a fall in quantity demanded for air travel. This price adjustment process will continue until a new equilibrium is reached, where both equilibrium Price and quantity will increase. Start-ups emerging, such as Vietravel, contributes to the number of firms supplying air travels. This results in the increase in supply of air travel from SS0 to SS1, causing equilibrium price to fall, and equilibrium quantity to increase. The combined impact results in a price that is indeterminate, which depends on the extents of shifts, and equilibrium quantity to increase. Whether this trend persists in the future depends on the PES value of air travel. This is because given the long time required to acquire a flight permit, even if the number of sellers increase, supply curve may not actually increase until they acquire the flight permit. Therefore with only DD increasing, the trend is limited by how readily existing firms can increase their quantity supplied (i.e. the PES value) in response to the increasing demand. Suggested Mark Scheme 1m for diagram and increase in quantity 2m each for DD / SS determinants 2m for any reasonable comment (e.g. Covid-19, restriction on foreign investment, difficulty in setting up new start-ups, increase in income may not be maintained)

(b) With the aid of a PPC diagram, explain one impact of increasing investment into airport infrastructure on the economy of Vietnam. [3] Increasing investment into airport infrastructure will lead to an increase in the quantity of capital goods thus increasing the quantity of FOP and increasing the productive capacity.(1) (Reference to PPC shift outwards 1m) This will allow for potential growth and future material SOL to improve. (1) → any end- point that links to “economy of Vietnam” (c) With reference to Extract 2, (i) State and explain, from an airline’s point of view, the relationship that exists between domestic flights and international flights. [3] The relationship is that of competitive supply. (1m) This is because both domestic flights and international flights utilise the same factors of production, such as the airplane and the flight attendants.(1m for concept of common FOP) Therefore should there be an increase in price in domestic flights, profitability increases, then profit-maximising firms will increase the quantity supplied of domestic flights, and do so by redirecting resources from international flights to domestic flights, causing the supply of international flights to fall. (1m for some understanding of redirecting) (ii) Discuss the desirability of implementing a price ceiling for domestic flights in Vietnam. [9] How the policy works The initial market equilibrium price is 0P and the quantity of the good traded is 0Q. When the government imposes a price ceiling of 0Pc, which is below the free market equilibrium price of 0P. The price falls to 0Pc. The quantity exchanged falls from 0Q to 0Q1 because the quantity of air travel supplied will only be up to 0Q1 even though the quantity demanded increased to 0Q2. The price ceiling is desirable Price ceilings are an immediate measure to address the extremely high prices caused by increased demand for air travel as price is reduced to below the market price as shown in Figure 1. This ensures that air travel can be kept affordable to ‘protect the interest of many classes of civilians traveling by air’. Price Quantity of air travel Price ceiling S D 0 Q 1 Q 2 Q P P c Y E X Z A

The price ceiling is undesirable At the market quantity Q, the consumer surplus (Area ZEP) is derived by the area bounded by the demand curve and the market price, while the producer surplus (Area AEP) is derived by the area bounded by the supply curve and the market price. In this case, consumer and producer surplus are maximised so there no deadweight loss. However, due to the price ceiling, the quantity traded in the market is reduced to Q 1 . At Q 1 , society values each additional unit of the good more than what it would cause society to produce it. More resources should have been allocated to the production of domestic air travel for consumption by society. Hence, there will be a deadweight loss (area XEY) incurred by society. There could likewise be another unintended consequence in that of profit- maximising producers redirecting resources from domestic air travel to international air travel (Extract 2), contributing to a shortage of domestic air travel of Q 2 Q 1 of the good as the quantity demanded is 0Q 2 but the quantity supplied is only 0Q 1 . This shortage will persist because the market is prevented from adjusting itself. Therefore, even though there might be affordable ticket prices, there is insufficient production of domestic air travel for the Vietnamese to consume. In the future, there is a fall in the profits and thus, this reduces the ability of the producers to improve the quality of domestic flights in the long run. Airlines may reallocate their sources to improve the international flights services instead. Consumers will lose out. Evaluation Given how the flights are meant to ‘promote economic development’, it is crucial for the price to be kept affordable for the Vietnamese to continue consuming. Considering that Vietnam is a developing country, with low income/capita, the price ceiling is essential but it is not desirable as firms cannot experience losses in the long run, and if they continue to do so, they may shut down. Should this happen, it will be undesirable. Considering that flights and air travel facilitate trade in goods and services as well, it is essential to remove the price cap and ensure that airlines are able to price their products and remain profitable. Moreover, the poor may not have access/benefit from the price cap, as the higher income groups can also utilise them. As such, price ceiling is not an efficient or desirable policy. A government can provide direct subsidy, targeted for the poor, in terms of payment vouchers to ensure that the lower income still have access to the air travel services and airlines still remain profitable and provide a critical service of air travel to the economy.

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Level Descriptor L2 (4-6) Well-developed Two-sided explanation on desirability of price ceiling with reference to issue presented in the case study. L1 (1-3) Mainly stating of price ceiling with no use of economic framework E1 (1-3) 2: A judgement with explanation and elaboration on whether price ceiling is desirable. 1: An unstated judgement on whether price ceiling is desirable. Understanding of the importance of air travel, and Vietnam is required for EV (2-3). (d) Using the concepts of price elasticity of demand and price elasticity of supply, with the aid of a diagram, explain why consumers rather than producers bear more burden of a tax imposed on air travel. [5] Tax on air travel increases the cost of production of producers, which will then decrease the quantity supplied by the producer at every price since it is now less profitable to produce air travel. Hence, the supply of air travel decreases and the price of air travel increases from P1 to P2. (1) When this happens, the burden of the tax will generally be borne by both consumers and producers, but the share of burden depends on the relative values of Price Elasticity of Demand (PED) relative to Price Elasticity of Supply (PES). The party that is less responsive to price changes will bear a greater burden of the tax. The PED value for air travel is likely to be < 1 given a lack of good substitutes for long haul travels. Assuming that PED < PES, when a tax is imposed, the price paid by consumers rises from P1 to P2 (in Figure 1 below). This leads to a less than proportionate fall in quantity (Q1 to Q2). The burden on consumers is greater (P2ABP1) than the producers (P1BCP3) as they are more able to pass on the greater burden of the tax to the consumers as the consumers are less responsive to changes in price. Suggested Mark Scheme Diagram (2m) (SS changes, tax revenue area, burden for consumers, producers) Explanation of Taxes affected P and Q (1m) PED (1m) PES (1m)

(e) Explain how negative externalities may lead to market failure in the market for air travel. [5] Assuming a perfectly competitive market, the demand curve reflects the marginal private benefit (MPB) of consuming an additional unit of air travel such as the ability to travel to another country while the supply curve reflects the marginal private cost (MPC) to the firm of producing an additional unit of air travel such as the cost of flight attendants and fuel. In the free market, producers being rational and self-interested will seek to profit-maximise and consider only their private costs and benefits when deciding how much to produce. This means that the free market equilibrium, where demand meets supply or when MPB = MPC is at Qe. However, production of air travel generates negative externalities, i.e. marginal external costs (MEC) to third parties. For example, the greenhouse gas emissions emitted can ‘endanger public health and welfare’ (Extract 3), which may cause respiratory problems to people, worsening their health and thus lower their non-material SOL. This is ignored by the airlines seeking to maximize profits. The MEC results in divergence between MSC and MPC. Hence, the marginal social costs (MSC) curve is above the MPC curve and MSC=MPC+MEC. However, the socially optimal level of air travel is at Qs where MSC=MSB. As Qe>Qs, there is over-production of air travel. QsQe represents an overproduction of air travel, that is, the price mechanism over-allocates resources to the market for air travel. From Qs to Qe, the MSC is greater than the MSB, and by summing the excess of the MSC over the MSB for all these units, we arrive at a monetary measure of the total deadweight loss to society which is equal to the area E0E1A. Therefore there is market failure as societal welfare is not maximized with the over-production of air travel.

Suggested Mark Scheme 1m for understanding of divergence/self interest 1m for Externalities (Who are the 3 rd parties and How they are affected) 1m for overproduction/overconsumption – Including → MPB=MPC + MSB = MSC / compare Qe to Qs 1m for DWL 1m for diagram (f) Extract 4 mentions ‘aviation taxes’ and the use of ‘technology and innovation’ to address the market failure in the market for air travel. Discuss whether on balance, these forms of government intervention in the market for air travel will be beneficial. [10] It is important to consider the costs and benefits of government intervention and the extent of welfare loss to assess whether society will benefit from it. The aviation tax works by having a tax on production equal to MEC at Qs so firms internalise the external costs . By doing so, it will lead to an increase firm’s private costs, thus shifting MPC curve vertically upwards by the amount of MEC , allowing the airlines to internalise the external costs. Hence, the new MPC now coincides with the MSC curve, and with the price of air flights increasing, consumers will reduce their consumption up to the Qs level of air travel, allowing for allocative efficiency to be achieved. A E 1 MPC MSC=MPC+MEC Quantity of Air travel E 0 Costs, benefits 0 MPB=MSB Q s Q m MEC

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The aviation tax is beneficial as it can be very flexible an instrument to help reach the social optimal level of air travel in accordance to changing MEC values. Extract 4 shows how by 2030, there is a likelihood of increased pollution and therefore the carbon price can be increased corresponding from 40 – 80 $/tCO2e, to 50 – 100/tCO2e, thereby allowing for Qs to still be achieved. Furthermore, different aircrafts may release different amount of carbon emission and thus, they could be tax differently. In addition, there can be tax revenue collected that can be used to invest into ‘CO2 - neutral fuels’, thereby helping to reduce the extent of MEC in the long run. However, if the tax cannot be accurately calculated, the implementation of such a tax can instead be detrimental to society. For example, the current carbon price is still a range from 40 to 80$/tCO2e, rather than a precise measurement. Should there be an over-taxation of air travel to MPC + tax as seen in the figure below, due to the difficulties involved in quantifying the extents of pollution and its costs, then it could instead lead leading to under- allocation of resources to the air-travel market, falling to Qe1. This could lead to a greater deadweight loss in the air travel market represented by area A, which is bigger than the initial deadweight loss area B. In this case, the society does not benefit from government intervention. Moreover, overtaxation could results in loss of jobs. The extract suggests that the demand for air travel can be price elastic, such that the rise in prices due to taxes, will lead to a more than proportionate fall in quantity demanded. As such, if the government overtaxes, then there could be a significant fall in quantity demanded and could lead to massive job losses, and thus, society may not benefit from government intervention. Tax Cost/Benefit Quantity of air travel MSB = MPB MPC Q s Q e 0 MSC = MPC with tax

The use of technology and innovation could be through investment into CO2- neutral fuels. This therefore reduces the extents of MEC in the air travel market. This will reduce the divergence between MPC and MSC, as seen from the diagram below, reducing the extent of deadweight loss as seen in area C. In the ideal, should the fuels not produce any form of air pollution, then this will effectively eradicate the divergence between MPC and MSC, allowing the free market equilibrium to coincide with the socially optimal equilibrium. The use of technology and innovation can be beneficial as it helps to deal with the root cause of the issue, which is the pollution emitted from the planes, and prevents such pollution to persist if such alternative fuels could be developed that contains no carbon footprint. However, it requires a substantial amount of budget to be allotted to such research and development, with no certainty that the investment will bear fruit. Technology may not be able to produce a good alternative as such carbon neutral fuel sources. Moreover, if borne by governments, they may then have to incur an opportunity cost of doing so. Should they have to redirect resources from other essential sectors like healthcare, this may cause an under-allocation of Quantity of air travel Costs/Benefits Qe Qs MPB =MSB MPC MSC MPC + tax Qe 1 Q s A E 1 MPC MSC=MPC+MEC Quantity of Air travel E 0 Costs, benefits 0 MPB=MSB Q s Q m MEC MSC 1 =MPC+MEC new Q sNew C

resources to healthcare, causing market failure and detrimental outcomes in the healthcare market. Overall, it seems like both of these forms of government intervention can be beneficial, given how firstly that taxes can indeed help with reducing the amount of air and noise pollution as seen in Extract 4, whilst providing the government with tax revenue to engage in technology and innovation, thereby allowing for the government to be more inclined towards investing in such a strategy, which can potentially be a more long-term solution. It is therefore with the above that I recommend that governments use both policies to achieve societally optimal levels of air travel. Level Descriptor L3 (5-7) Well-developed discussion of the two policies with good use of context and examples. L2 (3-4) Underdeveloped, discussion on the two policies OR Well-developed discussion on only one of the two policies. L1 (1-2) Mainly stating of policies with no use of economic framework E1 (1-3) 2-3: A judgement with explanation and elaboration on whether on balance beneficial 1: An unstated judgement on whether on balance the policies are beneficial.

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CSQ 2 (2021 VJC H1 Prelims adapted) (a) Compare the changes in unemployment rates from 2018-2019 across the economies in Table 3. [2] • From 2018 to 2019, the unemployment rate of Malaysia and Vietnam increased, while that of Singapore and Philippines decreased. [1] • Malaysia had the smallest change in unemployment rate, while Vietnam had the largest change in unemployment rate. [1] (b) With reference to Table 4, discuss the extent to which the data reflects that average living standards in Singapore is the highest amongst the economies. [8] Introduction • A country’s living standards refers to the well-being of its residents, and living standards comprises 2 aspects, which are material well-being and non-material well-being. • Material well-being stems from the consumption of goods and services, while non-material well-being stems from the intangibles, such as the state of the environment, amount of leisure time, etc. Body [P] From Table 4, Singapore’s Human Development Index (HDI) is ranked the best amongst the different economies, which could suggest that the average living standards in Singapore is the highest. [E+E] The HDI is a composite indicator which accounts for: (1) Average life expectancy, (2) Adult literacy rate (through mean years of schooling as well as expected years of schooling), and (3) Gross National Income per capita (at PPP) Average life expectancy is able to account for material well-bring because longevity is directly impacted by the access to quality healthcare goods and services. A country with a higher average life expectancy suggests greater access to quality healthcare goods such as medication and services such as hospital care while a country with lower average life expectancy suggests poorer access to such goods and services. Average life expectancy is also able to account for non-material well-being because longevity is also determined by the non-material aspects of standard of living (E.g. work-life balance, stress levels, etc.). Adult literacy rate is able to account for material well-being because education is a form of good and service. A country with higher adult literacy rates suggests greater access to educational materials such as textbooks as well as services by teachers and lecturers in schools. On the other hand, a country with lower adult literacy suggests poorer access to these resources and thus lower material well-being. Gross National Income (GNI) per capita measures the average income that accrue to the residents of a country, regardless of whether the income was generated domestically or overseas. This means that Singapore’s GNI, for example, captures income of Singaporeans living in Singapore as well as overseas. Higher GNI per capita suggests greater purchasing power to buy goods and services for the satisfaction of wants and needs. Thus, a country with a higher GNI per capita suggests a higher material well-being than a country with lower GNI. [L] Therefore, since Singapore’s Human Development Index (HDI) is the highest and ranked the best amongst the different economies (Table 4), this could reflect

that average living standards in Singapore is the highest amongst the economies. [P] However, from Table 4, Singapore’s pollution index (i.e. PM2.5) is as high as the other economies, which could suggest that the non-material living standards in Singapore may not be the highest. [E+E] The PM2.5 index provides information about the level of pollution that a country experiences. A country with high levels of pollution and poor environmental quality would have lower non-material well-being compared to a country where pollution is lower and the quality of the environment is better. This is because pollution would often lead to poorer health of residents and a lower quality of life for people. [L] Hence, since Singapore’s pollution index (i.e. PM2.5) is higher than the other economies, except Malaysia, this could suggest that the non-material living standards in Singapore may not be the highest. Evaluative Conclusion [Stand] The data in Table 4 reflects that average living standards in Singapore is the highest amongst the economies to a small extent. [Substantiation] This is because there are limitations to the HDI and hence it may be inaccurate to conclude that average living standards in Singapore is the highest, especially if the deciding factor of the HDI differences is GNI per capita. GNI per capita is an average figure. This means that if income distribution is highly unequal, the average Singaporean would earn far less than the average income. As a result, we cannot conclude decisively that Singapore’s residents have the highest living standards than the other three economies when we look at the HDI alone. Instead, other supplementary indicators such as the GINI coefficient can be used together with the HDI data in Table 4 for a more complete picture and conclusion to be drawn. Mark Scheme Level Knowledge, Application, Understanding and Analysis Marks L2 For a well-elaborated answer which considers the whether both aspects of standard of living (material and non-material) different components of the HDI, as well as the pollution index 4-6 L1 For an under-developed answer 1-3 Evaluation Up to 2 marks for an evaluative conclusion, which considers the limitations of the given data (c) Discuss the likely impact of “automation and smart machinery” (Extract 7) on Vietnam’s labour productivity and wage growth. [7] Impact on labour productivity and wage growth [P] “Automation and smart machinery” (Extract 7) increases the productivity of labour. [E+E] Labour productivity refers to the output produced per unit of labour. With ‘automation and smart machinery’, better machines are being used and this can allow each worker to produce a greater amount of output, assuming that they have the relevant skills to operate the better machines. [L] Therefore, t he productivity of labour increases with ‘automation and smart machinery’.

[P] Since the productivity of labour increases with “automation and smart machinery” (Extract 7), this allows for wages to rise and wage growth will be positive. [E+E] With a rise in productivity of labour, there will be an increase in output produced per unit labour and this will in turn increase the worker’s revenue contribution to the firm. As a result, at the same wage rate, rational firms in the industry will find it attractive to hire more labour. The market demand for labour would hence increase, as illustrated by a rightward shift of the demand curve from D to D’ in the figure below. The rise in demand creates a shortage of workers at the equilibrium wage rate, and hence there would be upward pressure on wages. Wage rate would hence rise from W to W’. [L] Therefore, with ‘automation and smart machinery’, wages will rise and hence wage growth would be positive. Evaluative Comments However, with “automation and smart machinery”, a rise in labour productivity and wage growth may not be seen for all workers. This is because Vietnam is facing an issue of ageing population, and hence it is likely that the older workers may be displaced by automation and smart machinery. These workers would thus become unemployed. However, the unemployed workers may not have the relevant skills to find a new job in other industries, and hence for this group of workers, they would not see a rise in labour productivity and wage growth but instead become structurally unemployed. Mark Scheme Up to 4 marks for a valid and well-elaborated analysis of the various impacts of automation and smart machinery on Vietnam’s labour pro ductivity and wage growth. Up to a further 3 marks for a valid and relevant comment on an unintended consequence of automation and smart machinery. (d) (i) Why might the Philippines Central Bank set a target for its inflation rate? [4] • Inflation refers to the sustained increase in the general price level of an economy, and is measured by the inflation rate. • The Philippines Central Bank might have set an inflation target for mild inflation so as to achieve price stability and hence actual growth. [1] Wage Quantity of labour SS L D D’ W’ W

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• Price stability encourages investment expenditure (I) as it creates a conducive business environment where the rising prices could suggest a rising demand for goods and services and also the steady increased means that there is no need to factor in uncertainty when planning production and sales. [1] • Positive economic outlook causes Investment expenditure and AD to rise. There would be an unplanned fall in firms’ inventories, encouraging them to increase production and hire more labour. More factor income would be paid, hence inducing consumption and further rises in AD. Through the multiplier process, there would be a multiplied rise in real GDP, generating actual growth. [2] (ii) Using AD/AS analysis and with the aid of Extract 8, explain why the Philippines did not meet their inflation target. [6] Philippines did not meet their inflation target of between 2-4%. Inflation slowed down to 1.7 per cent i.e. price increased but at a slower rate. AS factor [P] The Philippines did not meet their inflation target because factor input and food staple rice increased at a slower rate. [E] According to Extract 8, the new legislation allowing increased imports of the all-important staple of rice would have increased the domestic rice supply and thus exert a downward pressure on prices where there was a “sharp deceleration in price trends’. [E] Utilities and transport costs have also seen “softer price gains” meaning that the price increase of these factor inputs in other final goods and services has increased at a slower rate. With a slowdown in the price increase of these food staples and factor inputs, producers’ unit cost of production would have increased slower from AS0 to AS1 instead of AS2 and are thus willing to accept a lower price increase. [L] As a result of the price increased from P0 to P1 compared to the higher inflation of P3. Therefore Philippines did not meet their inflation target. AD factor [P] The Philippines did not meet their inflation target also due to slowdown in the increase in AD. [E+E] Extract 8 mentions that ‘the Philippine economy grew at below 6 per cent for the first time in 4 years’. Even though consumption expenditure rose, part of it was offset by a fall in government expenditure and investment expenditure. This causes the AD to rise only to AD1 instead of AD2. [L] As a result of the price increased from P0 to P1 compared to the higher inflation of P2. Therefore Philippines did not meet their inflation target.

Mark scheme 3m - AD factor 3m – AS factor (e) State the trend of public-debt ratio in Philippines from 2009-2018. Explain how a country’s public - debt ratio may affect its “fiscal space”. [6] There was a decreasing [1] trend of public-debt ratio from 2009 to 2018. ‘Fiscal space’ refers to the space in the government’s budget in which national policymakers are able to increase spending or cut taxes to stimulate the economy during periods of economic downturn. Public-debt ratio is the size of public debt to GDP, and so a higher public debt ratio may suggest a higher public debt or a smaller GDP. • Higher levels of public-debt (2m) could mean that the government is borrowing more to finance their spending and this may lead to an ‘unfavorable reaction from financial markets or undermining the longer - term health of public finances’ (Ext 9) due to reasons such as the crowding out effect where investment expenditure falls due to the rising interest rates. This makes it more difficult to undertake expansionary policies to stimulate economy during recession. • Lower GDP ( 2m) means that the national income has fallen and the government collects less in tax revenue possibly due to residents’ decreased spending, lowered income tax bracket. This will affect the government’s ability to spend on stimulating growth through G in the next time period. Therefore, a country with a high public-debt ratio would have less fiscal space [1] , and vice versa. (f) Discuss the various policies which can be adopted by ASEAN governments to achieve “environmentally sustainable growth”. [12] Introduction • Environmentally sustainable growth refers to a rate of growth that is sustained without creating other significant socio-economic issues such as depletion of resources and environmental problems, especially for future generations. • Sustainable growth can be achieved when actual growth, potential growth, and environmental protection / pollution reduction is achieved. GPL RGDP AS1 AS0 AD AD1 AD2 0 P3 P2 P1 P0 AS2

Body One policy that can be adopted to achieve ‘environmentally sustainable growth’ is to provide grants or subsidies for research and development (R&D), hence ‘encouraging innovations’ (Ext 10). [P] Providing grants and subsidies for R&D can achieve actual and potential economic growth, which are required to achieve sustainable growth. [E+E] Providing grants and subsidies for R&D will lower the marginal cost of conducting R&D, which will incentivize firms to conduct more R&D. With more R&D. there will be greater innovation and advancement in technology, and hence the quality of capital will rise. The rise in quality of capital raises the productive capacity of the economy and hence AS increases. This is illustrated by a rightward shift in the vertical AS, and Yf increase to Yf’ (Figure 1). Hence, potential growth is achieved. Furthermore, the productivity of capital will increase as machineries are upgraded to accommodate more advanced and fast-paced tasks. Productivity of workers should increase substantially as well as they are likely able to work at a faster pace to produce more goods and services with upgraded network speed and quality. Assuming wage rate remains unchanged, the unit cost of production for firms will fall, resulting in a rise in AS illustrated by a downward shift of the horizontal AS. Firms pass on the cost savings by lowering the price of their goods and services, resulting in a fall in the general price level. This fall in GPL leads to a movement along the AD curve due to the real balance effect as households consume more goods and services with the lowered prices, resulting in actual economic growth as shown by the rise in equilibrium real GDP from Y to Y’ (Figure 1). [L] Therefore, providing grants and subsidies for R&D can achieve sustained economic growth, which is required to achieve sustainable growth. [P] Moreover, providing grants and subsidies for R&D can improve the quality of the environment and reduce pollution. [E+E] Should greener and more environmentally friendly technology be developed as a result of successful R&D, negative externalities from pollution can be reduced and the quality of the environment can improve. This is supported by Extract 10 which stated that ‘eco -innovation in production technologies can be a key solution to help countries transcend the trap of growth- driven environmental degradation’.

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[L] Hence, providing grants or subsidies for research and development (R&D), especially on better and greener technology, can achieve sustainable growth for ASEAN economies. [P] ASEAN governments can also make use of fiscal policy to achieve actual and potential economic growth, which is necessary for sustained and sustainable growth. [E] The use of expansionary fiscal policy involves raising government expenditure and/or lowering direct taxes. For example, ASEAN governments can lower corporate taxes. This increases post-tax profits of firms and encourages them to increase their investment expenditure (I). The rise in I will increase AD, causing an unplanned fall in firms’ inventories. Firms will then increase production and hire more factors of production. National income hence increases and this induces another round of consumption. Via the multiplier effect, there will be a multiplied rise in real GDP, hence actual growth is achieved. In addition, the rise in investment expenditure means that there will be increased spending on capital goods (goods that aid in further production). If the increase in capital goods is greater than the rate of capital depreciation, the level of capital stock will rise (quantity of FOP) and this [L] leads to an increase in productive capacity for the economy. [P] Additionally, indirect taxes can be imposed on the production of goods or activities that generate negative externalities to reduce pollution and better the environment. [E+E] With pollution, negative externalities are generated where third parties such as those living around factories suffer from external costs which are not taken into consideration in producers’ decision making. An indirect tax leads to internalisation of the external costs generated in the production of a good by increasing the marginal cost of producing it. When an indirect tax that is equal to the marginal external cost (MEC) at the socially optimal level of output is imposed, firms are forced to internalize the external costs when making production decisions. Hence, the MPC curve shifts upwards from MPC to MPC’ by the amount of MEC at Q*. Assuming the government has perfect information and is able to estimate the MEC accurately, the tax results in a fall in market equilibrium output from Q to Q*. The new market equilibrium output (where MPC’ = MPB) coincides with socially optimal output (where MSB = MSC) level, causing the welfare loss to be eliminated and allocative efficiency to be restored. [L] With the environmental costs factored in, the growth that is achieved will be one that is more sustainable. Conclusion [Stand] Depending on the current level of economic development, different ASEAN governments can use different policies to achieve environmentally sustainable growth. [Substantiation] ASEAN economies that are currently experiencing high growth rates and are more developed would likely have the ability and resources to encourage R&D and the use of green technology. Therefore, grants and subsidies for R&D to achieve sustainable growth would be an effective and feasible policy for these governments. However, since the effects of R&D can

only be seen in the long run, governments of these ASEAN countries may choose to employ expansionary fiscal policy together with environmental regulations in the short run to complement the supply-side policy. On the other hand, for ASEAN economies that are currently developing, they are likely to have less ability to spend on encouraging R&D due to a high public debt ratio. Hence, they may choose instead to employ expansionary fiscal policy via lowering direct taxes and imposing production taxes to achieve environmentally sustainable growth. This will enable them to achieve actual growth more quickly, and also to increase their tax revenues collected to improve their government budget balance. Mark Scheme Level Knowledge, Application, Understanding and Analysis Marks L3 A well-developed discussion of at least 2 policies to achieve sustainable growth (both growth and reduced externalities) including the workings and possible limitations. 6-9 L2 Underdeveloped workings of policy with consideration of both elements of sustainable growth 3-5 L1 Descriptive answer with brief explanation of how various policies work to achieve some elements of sustainable growth. 1-2 Evaluation Up to 3 marks for an evaluative conclusion, which considers the context of different ASEAN economies

RI 2021 MOCK PAPER ANSWER SCHEME

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