SECTION A [40 Marks] Read the article below and answer ALL the questions that follow. Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience Policy context. A simultaneous health and economic crisis The outbreak of the coronavirus is resulting in a health crisis and a drop in economic activity that are without precedent in recent history. Containing and mitigating the spread of the coronavirus has rightly been the first priority of public authorities, so as to reduce the incidence of the disease it causes (COVID-19) and thereby also limiting the pressure on health systems. Many countries have introduced extensive containment and mitigation measures to slow down and reduce infection rates, and these often continue to apply today. Some countries, where the immediate impact of the crisis has receded, are moving to a second phase, seeking to ensure that further outbreaks do not occur while restarting economic activity, and strengthening resilience to outbreak-risk. Many other countries are currently experiencing the initial phases of the health crisis and the need for containment and mitigation measures is expected to continue. The containment and mitigation measures have had sudden and profound economic impacts. The health-triggered crisis has led to both supply and demand side shocks (Guerrier et al., 2020[2]). These measures have reduced production, creating shocks to supply, and coupled with the overall health crisis they have reduced business and household demand. OECD estimates suggest that the containment and mitigation measures could lead to an initial decline in economic activity of around 25% in some countries, and consumer spending falling initially by about one third - these are rough indications of the direct effects of the measures in a context of very large uncertainty about the economic impact (OECD,2020[1]). For each month of containment, an equally rough calculation suggests that there could be a loss of 2% of annual GDP. Uncertainty about the development of the pandemic is large. There are uncertainties with respect to the actual number of persons who are currently infected with the virus and those who have been previously infected and recovered from it. Evidence on the effectiveness of containment and mitigation measures is based on data for previous epidemics such as influenza, but the actual impact of containment and mitigation measures also depends on the timing and strength of implementation which may vary across countries (OECD, 2020[3]). Intense efforts are ongoing to expand the capacity to test, track and trace, to improve treatments for those with severe symptoms, and to develop a vaccine. The human and economic costs of the virus are already enormous, and could increase further. Where medical solutions through improved treatments, expanded testing, reduced caseload, or expanded hospital places become available, it may be possible to relax containment and mitigation measures gradually. However, there is substantial uncertainty about the outcomes of these efforts. In the absence of progress on improving health outcomes, decisions on de-confinement will involve increasingly difficult trade-offs, and may require the reinstatement of containment and mitigation measures, or partial de-confinement policies. It also remains to be seen how consumer and business behaviour will evolve when containment and mitigation becomes less tight. Policymakers need to clearly identify and communicate their objectives and act to maintain confidence in the face of these uncertainties. Policy objectives in relation to the pandemic.The immediate policy challenge is to support efforts to reduce the health crisis. This requires improving the funding and functioning of health care systems as quickly as possible by increasing intensive care capacity and the supply of protective materials, as well as supporting the efforts to develop tests, treatments and a vaccine. The stronger the efforts to tackle the virus, the more limited the impact of the virus and the associated economic impacts are likely to be (Eichenbaum, Rebelo and Trabandt, 2020[4]). The second challenge is to limit the adverse effects from containment and mitigation measures on households and businesses. This means ensuring that the economy is put on idle but does not break down while societies protect the most vulnerable and adapt to the presence of the risk posed by this virus.

In Phase 2, as containment and mitigation persist, broader and more sustained tax policy responses will be required. Tax policy should continue to focus on limiting hardship and maintaining the ability for a rebound. This phase calls for fine-tuning and potentially expanding the set of policies already implemented. On the business side, this includes adapting to the changing nature of risk, notably from liquidity- to solvency-risks: the longer lockdowns remain in place, the greater the strains on firm balance sheets may become even if liquidity support is provided. Instruments can include deferring tax payments, which can be similar to interest-free loans, and some countries are going further by waiving social security contributions and selected taxes, or taking over wage payments. Section 3 provides further suggestions. Strengthened support to households will also be critical to help them cope with greater risks of job and income loss, as the crisis continues. Phase 3 is about recovery, where fiscal stimulus may be needed to support investment and consumption. The build-up of corporate and household debt, increasing business closures and unemployment, and increasing economic uncertainty may reduce future investment and consumption. Where the recovery is anaemic, there may be a case for maintaining expansionary fiscal policy for a sustained period to stimulate broader consumption and investment, and build confidence. As mentioned above, the transition from Phase 2 to Phase 3 will most likely not be linear and smooth, with containment and mitigation measures being removed only gradually. This increases the risks of heterogeneous effects across firms and households. Supply shocks may also persist if the pace and the extent of relaxation differ across countries or regions, which would in turn reduce productivity. Stimulus needs to be carefully timed and well targeted. In transitioning towards stimulus, the removal of the short-term measures introduced in the containment phases should be done carefully and gradually, taking into account how different firms and households may have been impacted differently. Fiscal action should also learn the lessons from the global financial crisis (GFC), where fiscal stimulus was too limited in many countries that had room to increase it, and turned contractionary too early, unnecessarily lengthening the crisis and worsening debt positions. Stimulus may need to be adapted if supply bottlenecks remain or if certain sectors face a particularly strong rise in demand. Policies must match countries' specific circumstances and there will be no one-size-fits-all responses. In particular, developing countries may face specific challenges given their weaker healthcare systems and their more limited fiscal space. Whilst at the international level low income and low capacity countries especially have struggled to benefit from the international standards and instruments developed in recent years. In the short term, resource-rich countries may find their economic and fiscal situation worsened by recent oil price shocks. Thus, policy priorities as well as the room for policy response will differ across countries. Whilst most policy differentiation will take place at the domestic level, there may also be scope for some differentiation at the international level, where low income and low capacity countries may benefit from additional measures.

Policy coordination is key to an effective response. One lesson from the GFC is that policy action can have positive or negative externalities across countries. Economic support by some countries can create positive feedback loops through trade and investment links, providing a boost to the global economy. By analogy, there could be negative feedback loops through debt markets where countries in tight fiscal circumstances take expansionary fiscal action by themselves. There is thus a case for those countries with most room to act strongly to limit negative international spill- overs. In Phase 4, attention could shift to tax policy to help restore public finances. The financial strain on governments resulting from the support measures provided to businesses and households in earlier phases may be considerable. Once economies have recovered, countries may need to consider ways of raising revenues to restore long-term fiscal sustainability and fund public investments to strengthen the resilience of health systems, address distributional concerns and other longer-term risks, e.g. to counter climate threats. However, raising revenues will have to be timed and carried out carefully to be consistent with growth, inclusiveness and sustainability objectives. Extract from: https://www.oecd.org/coronavirus/policy-responses/tax-and-fiscal-policy-in-response-to-the-coronavirus-crisis- strengthening-confidence-and-resilience-60f640a8/ Answer ALL the questions in this section. SECTION B [60 Marks] Answer ANY THREE (3) questions in this section. QUESTION 1 (20 Marks) The containment and mitigation measures have had sudden and profound economic impacts. The health-triggered crisis has led to both supply and demand side shocks. Using examples from your country, critically discuss the impact of the COVID-19 pandemic on the economy. QUESTION 2 (20 Marks) Monetary and fiscal authorities deployed a number of containment and mitigation measures to minimize the impact of the pandemic. Using examples, illustrate the distinction between monetary and fiscal policies as well as explain which interventions were more effective. QUESTION 3 [20 Marks] Maintaining stable currencies is one of the major goals of the modern central banks. Notwithstanding the efforts by monetary authorities to achieve this objective, several emerging markets currencies have depreciated substantially. Critically discuss some of the factors affecting the performance of currencies in emerging markets and the impact on their economies. QUESTION 4 Oil prices climbed above $80 (59) a barrel on Tuesday, hitting their highest level in three years as the pound slumped. Brent crude, the international benchmark, rose to as much as $80.69 on the day, the most since October 2018. Prices have been rising for seven consecutive days on the back of the energy crisis in Europe. Analysts believe that oil prices will continue to rise amid surging demand and tight supplies. Investment bank Goldman Sachs said Brent could hit $90 per barrel by the end of the year, warning that rising input costs, higher gas prices and weaker growth were likely to weigh on European corporate profit growth for 2021. With the aid of well labelled diagrams, critically discuss how supply shock could result in higher prices. 4.1 (10 marks) A high-stakes game of oil diplomacy pits Saudi Arabia against long-time ally Abu Dhabi. And the result of their fight will shape not just the price of oil for the next year, but the future of the global energy industry. Discuss oil cartel's influence on the oil price movements globally and how that affects the economy of non-oil producing countries. 4.2 (10 marks) QUESTION 5 At the outset of the COVID-19 pandemic the demand for face masks increased markedly around the globe resulting in retailers. In addition, the sales of hand sanitisers, personal protective equipment (PPE) and cleaning and fumigating and similar products swelled across several international markets since the COVID-19 outbreak began in March 2020. According to data released by Grecques Consulting Pty, an international research firm based in the US, face masks sales grew by a year-on-year increase of 400% in April 2020. However, in December of 2020, the price of face masks retraced back to its pre- COVID-19 level. With the aid of diagrams, critically evaluate changes in the market type for the face masks industry post the initial COVID-19 shock in March 2020. 5.1 (10 marks) Critically discuss how price elasticity of demand of face masks was affected, including its impact on revenue at the outset of the pandemic relative to the later in that year, when the price of masks returned to its pre- COVID-19 level. 5.2 (10 marks) QUESTION 6 Who the US and China have trade disputes with Not long after US tariffs on $34 billion worth of Chinese goods kicked in, the Chinese government has responded by imposing its own 5% tariff on 545 US products, also worth a total of $34 billion. Trade disputes are nothing new for the two economic superpowers, and they are not confined to targeting each other. In total, China and the US have more than 300 disputes with different countries and trading blocks. China's trade disputes

As the above chart shows, China is involved in a total of 55 trade disputes, either as the complainant or responder. While the majority these are with the US, China also has 13 trade disputes with the European Union, plus a handful of others with countries including Japan and Mexico impose tariffs on hundreds of billions of dollars' worth of one another's goods. Former US President Donald Trump had long accused China of unfair trading practices and intellectual property theft. In China, there is a perception that America is trying to curb its rise as a global economic power. Extract: https://www.weforum.org/agenda/2018/07/united-states-china-trade-disputes-charts/ Using a diagram(s), discuss the impact of China's trade disputes with its trading partners on emerging and developing economies. 6.1 (10 marks) Using a diagram(s), evaluate the impact of the US imposing quotas on steel products from China. (10 m