(2025) A Level H2 Econs CSQ 1 Suggested Answers Outline (Draft)

CSQ1

ai. AD = C + I + G + (X-M)

AD = 304.6 + 142.5 + 111.3 + (-1.6)

= 556.8 trillion yen

aii. (X-M) = -1.6
(97.4 - M) = -1.6
M = 97.4 + 1.6
M = 99 trillion yen

b. Option A

Exports (X) form part of aggregate demand (AD = C + I + G + X – M). When exports increase, ceteris paribus, AD rises by a multiplied extent through the multiplier effect, resulting in higher national output. As firms experience greater external demand, they will expand production and hire more factor inputs such as labour. This helps to reduce unemployment and raises household income. With more workers employed and earning wages, private consumption (C) will increase, further reinforcing the rise in AD. Hence, the growth in exports indirectly stimulates domestic consumption through its positive impact on employment and income.

However, as export growth slows over time, the positive spillover to consumption may weaken, leading to a smaller boost in aggregate demand.

Option B

An increase in exports from 2021 to 2024 makes export-oriented firms more profitable. As firms experience rising sales and higher expected returns, they are likely to increase private investment to expand productive capacity to meet future export demand. This can lead to higher spending on new machinery or technology, thus increasing Investment.

Yet, since export growth is slowing, firms may become cautious about future profitability, leading to a smaller rise in investment than in earlier years.

c. Under Abenomics, the Bank of Japan (BoJ) implemented an expansionary monetary policy by lowering interest rates even into negative territory and engaging in large-scale quantitative easing.

Lower interest rates reduce the opportunity cost of spending and borrowing. This encourages households to purchase durable goods such as cars and appliances, thereby increasing consumption (C). At the same time, according to the Marginal Efficiency of Investment (MEI) theory, more investment projects become profitable as the cost of borrowing falls. This raises private investment (I).

Since aggregate demand is given by AD = C + I + G + X – M, the rise in consumption and investment increases AD. Through the multiplier effect, real national income and actual output rise from Y₀ to Y₁.

In the longer run, as firms invest more in capital goods, the economy’s productive capacity expands. This shifts the long-run aggregate supply (LRAS) curve rightward, increasing potential output from Yf₀ to Yf₁.

D. The Japanese government rolled out subsidies to support private sector investment, especially in areas like renewable energy and industrial upgrading. By lowering production costs, these measures allow Japanese firms to produce more efficiently and sell their goods at lower prices. This makes Japan’s exports more price-competitive on the global market. For Singapore, which also competes in high-value industries such as electronics and precision engineering, this could erode our relative competitiveness as international buyers may be drawn to cheaper Japanese alternatives.

Japan’s persistent fiscal deficits and rising debt now exceeding 250% of GDP could weaken investor confidence and lead to a depreciation of the yen against the Singapore dollar. A weaker yen makes Japanese exports cheaper, which reduces Singapore’s price competitiveness in overlapping export markets. 

e. Japan’s recent inflation has been driven largely by cost-push and imported factors rather than demand-pull forces. The sharp depreciation of the yen made imported goods especially energy and food more expensive, creating imported inflation. At the same time, higher global energy prices pushed up production costs for domestic firms, contributing to cost-push inflation as these higher input costs were passed on to consumers.

To curb such inflation, Japan can adopt supply-side policies such as structural reforms to enhance labour market competitiveness and productivity. For instance, encouraging female labour participation, retraining older workers, and improving labour mobility could make workers more efficient and lower unit labour costs. This raises the economy’s productive capacity, shifting the long-run aggregate supply (LRAS) curve to the right, from AS₀ to AS₁. As a result, the equilibrium price level falls from P₀ to P₁, easing inflationary pressure.

However, such reforms primarily address domestic cost-push pressures and take time to materialise. They do not directly tackle imported inflation arising from the weak yen. To address that, Japan could consider raising interest rates to attract capital inflows, which would strengthen the yen and reduce import prices. That said, a stronger currency may make Japanese exports less price-competitive internationally.

Overall, combining productivity-enhancing structural reforms with a gradual tightening of monetary policy could help to moderate inflation. Still, given that a large portion of Japan’s inflation is imported, these measures would likely reduce but not completely eliminate inflationary pressures.

f. From Table 2, it is clear that Japan continues to face several economic difficulties even after the pandemic, although some signs of recovery are visible. Inflation, which had previously been flat or negative, turned positive between 1.7% and 2.3% in recent years. This rise is largely cost-push and imported in nature, rather than demand-driven. The depreciation of the yen has made imported goods, particularly food and energy, more expensive, while higher global energy prices have increased firms’ production costs. The increase in Japan’s consumption tax has also added to domestic price pressures. Together, these factors explain why inflation is present.

The current account balance, though still in surplus, has declined sharply from 3.5% of GDP in 2019 to only 0.6% in 2024. This points to a weakening of Japan’s external competitiveness. While the weaker yen should, in theory, make exports cheaper, supply chain disruptions and high import costs for raw materials and energy have offset potential gains. As a result, export growth has been limited, and the current account surplus has narrowed despite currency depreciation.

In contrast, there are several encouraging trends. Japan’s GDP growth rate has turned positive, hovering around 1–2% annually since 2021, suggesting that the economy has avoided a prolonged recession. Likewise, the unemployment rate has gradually fallen from 2.8% to 2.4%, indicating a relatively strong labour market despite global uncertainty. For an economy with a shrinking population and long-term stagnation, maintaining low unemployment and moderate growth can be considered positive.

Nonetheless, deep structural challenges persist. Government debt remains extremely high, rising from 236% to over 250% of GDP, limiting the fiscal space for future stimulus. Such debt levels could undermine confidence in Japan’s long-term fiscal sustainability. 

Moreover, inflation in Japan’s context must be interpreted carefully. Having suffered from decades of deflation, mild inflation may actually reflect some success in escaping deflationary pressures. The current rate of around 2% is not excessive by global standards and may even support nominal income growth and spending confidence.

Overall, Japan’s post-pandemic recovery has been uneven. On one hand, moderate inflation and positive growth indicate progress compared to the deflationary trap of the past. On the other, structural issues such as a rapidly ageing population, weak productivity growth, a high public debt burden, and declining external competitiveness suggest that Japan’s economic difficulties have eased, but not disappeared. The challenge moving forward will be sustaining growth without reigniting fiscal or inflationary pressures, and achieving genuine productivity-driven expansion rather than relying on stimulus.