2023 H2 A Level Paper 2 Question 6

The use of expansionary demand-side policies designed to achieve economic growth or to lower
unemployment may lead to undesirable consequences.

(a) Explain why expansionary fiscal policy designed to achieve economic growth or lower
unemployment may lead to undesirable consequences. [10]
(b) Discuss whether expansionary supply-side policies would be effective in achieving the
macroeconomic policy aims for an economy. [15]

Part (a) (Question Analysis)

Command Word Explain why
Approach Start point Expansionary fiscal policy  higher growth + lower u/e
End Point Undesirable consequences
Content • Expansionary fiscal policy for growth / lower u/e
Content
and • And its consequences
Context Context Generic

Suggested Response

Introduction
• Economic growth refers to the rate at which an economy’s real national income/output
increases over a period of time.
• Lower unemployment refers to a fall in the proportion of the labor force that is unemployed.

Requirement (1) – Undesirable consequence of demand-pull inflation.

• Expansionary fiscal policy refers to when the government increases government expenditure
(G) and decreases taxes (personal income tax and corporate income tax) to increase
aggregate demand (AD) via the components of G, consumption (C) and investment (I)
respectively.
• AD refers to the total spending on goods & services produced in the economy at each general
price level by the four sectors (h/hlds, firms, govt and foreigners).
• Assuming the economy is initially operating below full employment output level, along the
horizontal range of the AS curve.
• With the rise in AD from AD0 to AD1 (Figure 1), total spending exceeds total output produced
 unplanned fall in stocks / inventories. Firms step up production of output by hiring more
factors of production including labor, leading to the increase in real NY from Y0 to Y1 in the
first round of the multiplier process  triggers the multiplier process where the increase in
induced-consumption further increases AD from AD2 to AD5 for a few rounds. The multiplier
process stops when the rise in real NY is insignificant to create increases in induced
consumption. The real NY increased by multiplied from Y0 to Y1 to Y5 Actual growth is
achieved.

Figure 1: Economic (actual) growth

• However, if the economy was on the intermediate or vertical range of the AS, that is operating
near or at full employment  resources become increasingly scarce and firms have to
compete for them, pulling up prices and costs  GPL increases from P0 to P1, leading to
demand-pull inflation (Figure 2).

Figure 2: Demand-pull inflation

Requirement (2) – Undesirable consequence of crowding out effect

• Expansionary fiscal policy can lead to the undesirable consequence of crowding out.
Crowding out occurs when governments may borrow to fund their spending. Crowding out is
the decrease in private expenditures (C and I) that occurs as a consequence of increasing the
government budget deficit. Then the government needs to borrow in order to pay for its
overspending. However, this increases the price of money / cost of borrowing / interest rate.
As interest rate rises, consumption and investment spending fall, leading to crowding out. This
effect renders expansionary fiscal policy less effective than intended because the increase in
G is offset by the decreases in C and I, so overall effect on the increases in AD is muted.
• (Note: How non-sustainable growth might also be a possible point.)

Conclusion
The two undesirable consequences are demand-pull inflation and crowding out effect.
Mark Scheme
Band Knowledge, Understanding, Application, Analysis Marks
L3 For an answer that shows well-developed explanation of the concepts of 8-10
demand-pull inflation and crowding out.
L2 For an answer that shows under-developed analysis of the undesirable 5-7
consequences
• lacks details in analytical explanation (i.e., limited use of AD/AS analysis,
gaps in demand-pull inflation analysis or gaps in diagrammatic analysis)

Or, for an answer that provides one relevant undesirable consequence

L1 For an answer that shows limited knowledge of undesirable consequences. 1-4
• with listing of points, unexplained statements, or descriptive response
• major conceptual errors

(b) Discuss whether expansionary supply-side policies would be effective in achieving the
macroeconomic policy aims for an economy. [15]

Part (b) (Question Analysis)

Command Word Discuss whether – balanced answer with evaluation
Approach Start point Supply-side policies
End Point Macroeconomic policy aims
Content • Economic growth (Actual, Potential, Sustainable)
Content
and • Unemployment
Context Context An economy

Suggested Response

Introduction
• The selected macroeconomic policy aims for an economy in this discussion are inclusive and
sustainable growth and low unemployment
• (other macroeconomic policy aims ie low inflation, healthy BOT are acceptable)

Requirement (1) – How expansionary supply-side policies works to achieve inclusive /

Sustainable growth + Limitations
• Inclusive growth refers to the growth that is broad-based across economic sectors and creates
productive employment opportunities for the majority of the country’s population. To achieve
inclusive growth = sustained growth + equity.
• Or Sustainable growth = a rate of growth that can be maintained without creating other
significant economic problems (such as resource depletion and environmental problems),
particularly for future generations. To sustainable growth = sustained growth + environment.
• A type of expansionary supply-side policies promote long-term growth by raising the quantity
and quality of resources (eg investments in education, capital and technology) e.g. eg
Automation Support Package e.g. self-serving kiosks at restaurants, that help firms to
automate their production processes
•  increase in the productivity of capital and labour resources ie more output produced per
input per time  increase the production capacity of the economy, increasing long-run
aggregate supply (LRAS) and potential growth.
• An expansionary supply-side policies require some government expenditure in the
investments  so it can have the secondary effect of increasing the G component of AD 
actual growth.
• With both actual growth and potential growth, sustained growth is achieved ie growth can be
sustained without inflationary pressures (Figure 3)

Figure 3: Sustained growth

• Expansionary supply-side policies can achieve sustainable growth via Innovation / promotion
of green technology eg solar energy that help reduce carbon emissions/ global warming.
Rising productivity also means getting more out of existing resources so fewer resources are
wasted.
• Limitations:
o Policy conflict / trade- off: Improving productivity through automation to achieve potential
growth may result in structural unemployment if low- skilled workers don't have relevant
skills so unable to find employment in high- skilled jobs.

Intermediate Evaluation (1)

• The extent of the danger of structural unemployed is that it could lead to income inequality as
the income gap widens between the unemployed or even low-skilled workers and high-skilled
workers, there is the risk of the economic growth which is non-inclusive.

Requirement (2) – How expansionary supply-side policies works to achieve low

unemployment + Limitation
• Another type of supply-side policies enhance factor mobility by promoting retraining, job
matching and various measures to enable both factor and product markets to operate more
efficiently.
• Improve labour mobility  Retrain workers can make them more employable as they are now
equip with the skills relevant to the new jobs / sectors  reduces the mismatch between jobs
and skills and thus reduces structural unemployment.
• Encouraging skills upgrading can help low-skilled workers more employable with better jobs
and higher pay  narrowing income gap between high-skilled and low-skilled workers 
reducing income inequality  can also achieve inclusive growth.
• Limitations:
o Success of supply-side policies depends on the receptiveness of firms and workers
despite government support. Workers may not want to undergo retraining or skills
upgrading. Firm/employer support is also a big hurdle.
o Financial support eg Singapore’s SkillsFuture credit of $500 may not be enough. It is also
costly. Furthermore, with government efforts to invest in human capital incurs opportunity
costs in terms of spending elsewhere forgone.

Intermediate Evaluation (2)

• The extent of the effectiveness of the policy will depend on the receptiveness of firms and
workers. The government needs to convince and create the buy-ins that increasing labour
productivity will benefit for employers and workers. Individual workers will then be motivated
to embark on the skills upgrading with the adequate support from their firms e.g. flexible
working hours during courses.
• The extent of the feasibility of the policy will depend on the state of the government budget
to sustain the workers’ training.

Summative Evaluation
• Stand: In conclusion, expansionary supply-side policies can achieve the macroeconomic
policy aims of inclusive and sustained growth and low unemployment by increasing the
economy’s LRAS primarily and increasing factor mobility in the long run.
• Justification: Expansionary supply-side policies are effective especially in the context of
globalisation and technological advancement. Globalisation and technological disruption are
some of the root causes of higher structural unemployment and widening income inequality.
Moreover, many developed countries have been experiencing stagnant LRAS as productivity
suffers, hence supply-side polices are appropriate to achieve sustained growth which is
prerequisite for inclusive / sustainable growth.
• Recommendation: However, in the short run, expansionary demand-management policies
are more effective because the policies can respond quickly to a fall in the aggregate demand
as evident in the Covid pandemic recession.

Mark Scheme
Band Knowledge, Understanding, Application, Analysis Marks
L3 For an answer that shows well-developed and well-balanced explanation of how 8-10
expansionary supply-side policies achieve the two policy aims
• well-supported with diagrammatic analysis (AD/AS diagram)
L2 For an answer that shows under-developed explanation (i.e. limited effective use 5-7
of relevant economic analysis or gaps in diagrammatic analysis);

Or one-sided explanation of one potential supply-side policy, and an irrelevant

alternative policy such as expansionary fiscal policy, exchange rate policy or use
of FTAs.
L1 For an answer that shows limited knowledge that lacks breadth or depth 1-4
• with listing of points, unexplained statements, or descriptive response
• major conceptual errors ie confuse demand-side and supply-side policies
• Smattering of points
Band Evaluation Marks
E3 For an answer that arrives at a well-explained evaluative judgement about the 5
extent of the effectiveness of supply-side policies in achieving macroeconomic
policy aims ie appropriate evaluative judgements about the likely effectiveness of
supply-side policies in achieving the macroeconomic policy aims, culminating in
a summative conclusion.
E2 For an answer that make some attempts at a judgement about the effectiveness 3-4
of supply-side policies in achieving macroeconomic policy aims ie a single
evaluative judgement that was well-explained or made statements rather than
explain the underlying reasons for their judgements.
E1 For an unsupported statement about the extent of the effectiveness of supply- 1-2
side policies in achieving macroeconomic policy aims or summative conclusion
was either missing or repeated a statement of the judgements already made.