Slowing Down of the BRIC — Macroeconomic Goals (NYJC Prelim)

Answers

(a)(i) Summarise — [2]

In 2011, both India’s and China’s real GDP growth was positive, but China grew at a higher rate (9.2% vs 7.2%). India’s unemployment (9.8%) was also higher than China’s (4.0%). [1m: compare any two aspects] On these macroeconomic indicators, China performed better than India in 2011, on both economic growth and unemployment. [1m: general performance]

(a)(ii) Explain — [2]

China’s inflation might decrease. An appreciation of the Yuan makes imported inputs cheaper in Yuan terms, reducing imported cost-push inflation. [1m valid indicator + 1m direction]

OR — China’s real GDP growth might decrease. As the Yuan appreciates, imports become cheaper in Yuan while exports become dearer in foreign currencies, worsening the balance of trade (X − M), which lowers AD and growth. (See the exchange-rate transmission.)

Mark scheme — refer to a valid indicator (1m); link appreciation to its change, stating the direction (1m).

(b) Explain, with AD/AS analysis — [6]

This draws on the AD/AS model and the components of aggregate demand.

Evidence 1 — recession in the Eurozone. Per Extract 1, there is “recession in the Eurozone”. Falling European incomes reduce demand for BRIC exports, cutting BRIC export revenue (X). [2m]

Evidence 2 — excessive fiscal deficit. Per Extract 1, governments run “excessive fiscal deficits” — spending exceeds revenue. To finance this they must raise tax rates; higher taxes cut household disposable income and purchasing power, reducing consumption (C) and investment (I). [2m]

AD/AS analysis. Since X, C and I are components of AD, aggregate demand falls from $AD_0$ to $AD_1$ ; through the reverse multiplier effect, real national income falls by a multiple from $Y_0$ to $Y_1$ — negative actual growth. [1m graph + 1m description with reverse multiplier]

Falling X, C and I shift AD left (AD0→AD1); real national income falls Y0→Y1 via the reverse multiplier (slower/negative growth).

Mark scheme — link Eurozone income fall to falling export revenue (2m); link fiscal deficit to fall in C/I (2m); accurate graph (1m); accurate description of the change with the reverse multiplier effect (1m).