DSE 15-12

Research shows that the “Individual Visit Scheme” of mainland tourists has brought economic benefits to Hong Kong. However, more and more Hong Kong residents have called on the government to reduce the number of mainland tourists to Hong Kong under the Scheme.

An economist uses the AS-AD model to analyse the current situation in Hong Kong. In his analysis, point E in Figure 2 represents the initial short-run equilibrium of the Hong Kong economy.

(b) He points out that the government can help the economy restore to its long-run equilibrium. With the aid of Figure 2, explain how the reduction in the number of tourists from the mainland can lower the output level to Y_f. (5 marks)

(c) He also states that even without the help of the government, market forces can restore the economy to its long-run equilibrium. WITHOUT using a diagram, explain how market forces can lower the output level to Y_f in the long run. (4 marks)