Michael Lohh

Factors that Influence Decisions in Macroeconomic Policies Point: The multiplier size of a country influences decisions made regarding

macroeconomic policies that are undertaken by the government. If the multiplier is small, the government may prefer to avoid utilising expansionary fiscal and monetary policies when dealing with problems such as high cyclical unemployment levels and recession, as both of the aforementioned policies have to work through the multiplier effect and the multiplier size limits their effectiveness.

Point: Interest elasticity also plays a huge part in influencing the government’s decisions regarding its choice of macroeconomic policies. For example, in the case of the recession that struck the USA in 2008, low-interest elasticity persisted although the government had lowered interest rates to near zero levels in order to boost investment and consumption levels. Investors and consumers both had a pessimistic outlook of the US economy due to the severity of the 2008 crisis, and hence they were still unwilling to consume or invest despite the lower interest rates. Hence in this case, the US government’s Federal Reserves may not want to employ an expansionary monetary policy to counter recession.

The Marshall Lerner Condition also plays a large part in influencing the decisions of the government regarding its macroeconomic policies. If the Marshall Lerner Condition is more than one, the government may prefer to avoid depreciating the country’s currency to counter the balance of payment (BOP) deficit as well as the recession. If Marshall Lerner condition is not fulfilled, net exports will not rise. In fact, the depreciation of the country’s currency will only worsen the current account deficit in the short run due to the J curve effect.

Evaluation 1: The significance of the multiplier size, interest elasticity as well as the Marshall Lerner Condition depends on the characteristics of the economy in question too. For example, for a small and open economy such as Singapore, which relies heavily on external demand to support its economy, the Marshall Lerner Condition has a huge bearing in its macroeconomic policies, as it relies on its exchange-rate policy to counter problems such as recession.

Evaluation 2: The choice and policy preference of the government may also influence the macroeconomic strategies of the government. If the government has a long-term outlook, it will decide to employ a long-run supply-side policy in the form of provision of training to workers as well as provision of grants for R&D. In this case, the multiplier effect, interest elasticity or even the Marshall Lerner Condition does not influence the macroeconomic policies of the government at all, since the long-run supply-side policy works through the aggregate supply (AS) instead of the aggregate demand (AD).

Singapore’s Fiscal Budget Allocation

Point: The Singapore government allocates the largest amount of its fiscal budget to the defence and education ministries to ensure that its macroeconomic goals of an efficient economy and robust economic growth are met.

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Point: The Singapore government allocates the largest amount of its fiscal budget to the defence and education ministries to ensure efficiency in the economy. Defence is an example of a public good, which is non-rivalrous and non-excludable in nature. If the provision of defence is left to the private sector, there will be none provided and the government will have to step in to ensure that there is an allocative efficient level of production of defence. Education is a merit good that also generates positive externality and the government has to spend a huge amount of its resources to correct market failure and ensure efficiency in the economy.

Evaluation for public good (Government failure)

The government’s efforts to provide public good to correct market failure may be hindered by imperfect information. Due to the non-excludable nature of public goods such as defence, there is a free ridership problem and no demand is expressed by consumers. Hence the government may over-produce or under-produce the public goods, leading to an over-correction of the initial market failure.

Evaluation for merit goods (policy specific)

It is difficult to measure the exact value of the MEB in monetary terms, as externalities are unpriced effects. If they are not accurately estimated, it may result in under-correction or over-correction of the positive externalities.

Evaluation (government failure) 1

Government intervention in the fields of defence and education incurs additional administrative costs. Moreover, government entities have no profit motive and they may become complacent. Hence inefficiencies may worsen and even higher administrative costs may be incurred, causing losses of societal welfare.

Evaluation (government failure) 2

Politicians may be motivated more by political power than economic reasons. Hence when they implement policies, their objective is to retain political power, not maximise efficiency in the economy.

Point: The government’s efforts to allocate more resources to defence and education also helps Singapore to realise robust growth in the long run. Investments in education can boost the quality of labour in Singapore, attracting more investments (rise in AD and achieve actual economic growth) and also achieving potential growth as the quality of factors of production rises).

Investments in defence assure foreign investors that their capital is safe in Singapore thus attracting the investments and raising the AD, allowing the country to enjoy actual economic growth.

Value judgement 1

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The ability of the government to successfully implement each policy depends on its ability to accurately assess the marginal social benefit (MSB) and marginal social cost (MSC) of defence and education in Singapore.

Value judgement 2:

Every policy has its shortcomings. Thus the government has to periodically review them in light of the current economic situation of the country.

Pros and Cons of Fiscal Prudence Point: The government may wish to maintain fiscal prudence to ensure that investors

have confidence in the economy. This allows investments levels to increase, leading to an increase in AD and a multiple increase in national income. Moreover, investments in infrastructure ensure the increase in the capital stock of the economy and the productive capacity of the economy. This in turn ensures the rise in the AS and the potential economic growth of the country.

Point: The government should maintain fiscal prudence to ensure that there is no crowding-out effect in the country. If the government borrows excessively from banks to finance its budget deficit, firms will have to compete with the government in borrowing money for their investments. The demand for loanable funds will then rise and in turn cause interest rates to rise and investment levels to fall. Consequently, the AD and real national income falls.

Point: Fiscal prudence ensures that there is no excessive spending on welfare programmes, which may serve as a disincentive for work and investments. This means that fiscal prudence ensures that the economy’s labour productivity is maintained or even increased when the workers realise that they cannot rely on welfare handouts for their livelihood. This in turn boosts the productive capacity of the economy, causing the AS to rise and the country to enjoy potential economic growth.

Point: Fiscal prudence ensures inter-generational equity because if the government decides to finance its fiscal debt by borrowing funds from banks, future generations will suffer a fall in their material standard of living. Since the governments has to pay for interest on the funds that they have borrowed, the amount of interest that it has to pay will accumulate in the years to come. Hence future generations will have to pay a larger proportion of their income as taxes to finance the accrued interest. This then lowers their material standard of living.

Evaluation 1

Fiscal prudence may not be necessary if the country is facing a recession. The government may need to embark on an expansionary fiscal policy to combat the recession by lowering corporate and personal income tax rates as well as raising government expenditure. This thus causes consumption expenditure ©, investment (I) and government expenditure (G) to rise. The AD rises as well. Although this may result in a fiscal deficit, it may still be necessary during a recession.

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Evaluation 2

Fiscal prudence may not be necessary if the government is spending on infrastructural construction projects as well as development of labour productivity or R&D through its long-run supply-side policy. Although this spending may cause the government to incur a budget deficit, it also ensures that the productive capacity of the economy will rise, allowing the economy to enjoy potential economic growth in the long run.

Value judgement

Whether or not fiscal prudence is desirable depends on many factors. For example, during an economic recession, fiscal prudence may not be desirable, as budget deficit may be incurred while combating the recession. Hence the government needs to periodically review its policies in light of its current economic circumstances.

Effect of Revaluation of the Yuan Point: if china decides to revalue its yuan due to international pressure, its current

account and Bop will worsen because its export revenue will fall and import expenditure will rise. Moreover, since it is an export-oriented economy, it may face a fall in AD and a slowdown in its economic growth.

Evaluation 1

If China revalues its currency, resulting in appreciation of the currency, its cost of production may fall, as the price of imported factors of production such as complex machineries will then fall, moderating a cost-push inflation in China.

Evaluation 2

We must also consider whether the Chinese government has been implementing policies in order to minimise the adverse effects of the revaluation of the yuan, such as the long-term supply-side policy of providing grants for R&D that can help to devise more cost-efficient methods of production.

Value Judgement

In conclusion, it can be said that if China ever decides to revalue its currency, it will be a political and not an economic decision (due to pressure from the international community). However, this does not mean that China cannot benefit from the exercise. The under-valuation of one’s currency may be considered as protectionism. If the practice is abolished, China’s economy will embrace its true comparative advantage and specialist in it to take advantage of the rise of globalisation.

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How an Under-valued yuan can affect Singapore’s balance of payment

1. Point: An under-valued yuan can have various negative effects on Singapore’s BOP. For example, if the yuan is under-valued against the USD, Singapore’s exports to the USA will lose its competitiveness against Chinese exports to the USA.

2. Point: AN undervalued yuan can also lead to the worsening of Singapore’s capital account .China’s undervalued yuan means that Chinese exports more price-competitive in the global market and hence foreign investors may prefer to establish export production bases in China instead of Singapore. This in turn leads to an outflow of FDI, which worsens Singapore’s capital account and BOP.

Evaluation 1

An under-valued Chinese yuan may not necessarily cause the worsening of Singapore’s current account, especially if Singapore moves into the production of higher value-added goods in which China does not have a comparative advantage. The under-valuation of the yuan, which can lead to the rise of China’s national income, means that the purchasing power of Chinese consumers will rise, leading to a rise in demand for Singapore’s exports in china, thus improving Singapore’s current account, ceteris paribus.

Evaluation 2

An under-valued yuan may not cause the deterioration of Singapore’s capital account as the trend of outsourcing to China by MNCs is limited to only processes that require cheap low-skilled labour. Complex processes that require highly skilled labour may still stay in Singapore, so the capital account may not worsen.

Value Judgement

The extent of the effects of the under-valuation of yuan also depends on Singapore’s trade pattern with China. For example, if Singapore exports are close substitutes to China’s exports, then the worsening of Singapore’s current account is more likely to occur. However, since Singapore produces high value-added goods in which China does not have a comparative advantage, it is likely that Singapore’s current account will prove, as a higher Chinese national income will lead into increased demand for Singapore exports to China.

Factors Determining the Domestic Equilibrium Exchange Rate Point: Foreign factors seem to affect the exchange rate of the Singapore dollar

against other currencies greatly, particularly in the present day when the world’s developed economies such as the USA and the UK are lowering their interest rates in order to revive their recession-stricken economies. Hence there is an influx of speculative capital flowing into Singapore since Singapore’s domestic interest rate is relatively higher than those economies, causing demand for Singapore dollar to rise and the Singapore dollar to appreciate against foreign currencies.

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Point: Expectation of foreign speculators on the exchange rate of the Singapore dollar also has substantial impact on the exchange rate of the dollar against foreign currencies. If foreign speculators expect the dollar to depreciate against foreign currencies, they will sell the Singapore dollar, causing it to depreciate against foreign currencies as seen in the 1997 Asian Financial Crisis.

Point: The domestic inflation rate of other countries can also affect the exchange rate of the Singapore dollar. Since Singapore depends on imports for its consumer goods and raw materials, the rising prices of such goods in their country of origin due to inflation may cause the Singapore dollar to depreciate against foreign currencies. As the demand for imported goods is price-inelastic, and the quantity demanded for these goods falls less than proportionately and therefore the demand for foreign currencies rise, causing the Singapore dollar to depreciate against foreign currencies.

Evaluation

Domestic factors can also contribute to the fluctuation of the exchange rate of the Singapore dollar. For instance, the stability of the exchange rate of the dollar against other foreign currencies over the years is a result of the government’s sound polices in controlling inflation through long-term and short-term supply side policies. Thus this promotes export competitiveness, along with social and political stability which encourages influx of FDI. Hence with a healthy current and capital account there is a healthy BOP and the Singapore dollar’s exchange rate against other foreign currencies is kept stable due to domestic policies.

Value Judgement

Both domestic and external factors are significant in influencing the exchange rate of the Singapore currency. However, it is highly likely that external factors have a greater influence over the dollar’s exchange rate with other foreign currencies, as Singapore is an open and small economy.

Appreciation of Currency Point: A country’s policy of appreciating its currency worsens its current account and

exports of the country lose their price competitiveness due to the fact that they are more expensive in foreign currency terms, causing export revenue to fall.

Evaluation 1:

However in the case of Singapore, its exports have very high import content, since it is reliant on imported raw materials. Hence the appreciation of the Singapore dollar lowers the price of these inputs in terms of the Singapore dollar, lowering the unit cost of production of Singapore exports, making its exports more price-competitive.

Evaluation 2:

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The appreciation of the country’s currency, if excessive, may also cause the worsening of the capital account, as the country loses its competitiveness as an international business location, and there is an outflow of FDI from the country.

Depreciation of the Singapore dollar Point: Depreciating the Singapore dollar may be beneficial to the Singapore

economy, as the price of Singapore’s exports are now cheaper in foreign currency terms while imported goods are more expensive in dollar terms. This then results in rising net exports as well as AD< provided that the Marshall-Lerner Condition is met. This causes a rise in real national income and also a fall in unemployment levels. In addition, considering that a huge proportion of Singapore’s AD is made up of external demand, a rise in net exports may cause a large increase in real national income and a significant fall in unemployment levels.

The rising export revenue and falling import expenditure may result in an improvement in Singapore’s current account. This then allows for the improvement of the BOP.

Evaluation 1:

However, in the short run, depreciating the Singapore dollar may result in a worsening of Singapore’s current account instead due to response and contractual lags. (The Marshall-Lerner Condition not met in the short term)

Evaluation 2:

Moreover, the rising AD leads to the intensification of demand-oil inflationary pressures.

Evaluation 3:

Singapore is a small and open economy that relies on imported goods for consumer goods and raw materials, due to its lack of natural resources. As a result, any depreciation of the Singapore dollar only makes these essential imported goods more expensive in dollar terms and as a result, there is increasing cost-push inflationary pressures and rising general price level (GPL).

Evaluation 4:

If other economies retaliate by depreciating their currency as well, there will be no increase in net exports and real national income. Moreover, the levels of unemployment will not all.

Value Judgement

Any depreciation of the Singapore dollar, although allowing it to enjoy a rise in net exports and AD, serves only to provide an artificial comparative advantage I the production of tis exports. Singapore should instead focus on long-term supply-side policies such as providing grants for R&D in order to realise its true comparative advantage in the production of high value added goods to boost net exports.

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Pros and Cons of Rising Labour Productivity Point: Rising labour productivity may be beneficial for Singapore, as the increase in

labour productivity lowers the unit cost of the production of goods and this in turn causes the short-run aggregate supply (SRAS) to rise moderating inflationary pressures and causing real national income to rise as well. This then causes the material standard of living of the people to increase.

Point: Due to the lower unit cost of production of Singapore-made goods, Singapore’s exports are more competitive in the global markets .Hence export revenue rises and net exports also rise. This causes an improvement in the current account and the BOP of Singapore.

Point: Rising labour productivity also ensures that Singapore remains a favourable investment destination to its investors. As investment levels rise, the capital quantity and the productive capacity of Singapore also rises, causing the aggregate supply to rise and allow Singapore to enjoy potential economic growth. Furthermore, there is improvement in the capital account due to the influx of FDI.

Evaluation 1

However, rising labour productivity may not always be beneficial for Singapore, especially when workers are under tremendous pressure to perform and be more productive. The resulting work-related stress may result in domestic problems for these workers. This means that non-material standard of living of Singaporeans would have fallen.

Evaluation 2

The increase in real national income due to rising labour productivity may not be well distributed in society, as the rich are the ones who own most of the factors of production. In the event of an increase in real national income, they gain more than proportionately. This then worsens the problem of income inequality in Singapore.

Evaluation 3

If the increase in labour productivity is a result of the utilisation of more capital-intensive methods of production, such as machinery, there may be rising levels of structural unemployment, which means that some people will lose their source of income and their material standard of living will be lowered.

Government policies to improve on labour productivity The government can implement various policy tools to address the issue of falling

productivity levels. One of the policies they can adopt in the long-term supply-side policy of re-training and upgrading the skills of workers. This can be done through providing subsidies on training programmes. This then enables workers to be more skilled in their jobs and improve the labour quality and productivity.

Evaluation 1

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The success of this policy depends on the age, aptitude and attitude of the workers involved. Some workers are unwilling to forego their current income to go for training. IT may also take some time for workers to be trained before they can apply the skills learnt during training. Hence it is not a solution for urgent problems.

Evaluation 2

Increasing pressure to keep on upgrading oneself and the stress that may result from juggling part-time education and work may affect the labour situation. In this case, the government’s policy to introduce upgrading of skills may backfire and productivity may fall due to mental stress in workers.

Point: Another policy that the government can adopt to boost labour productivity is the tightening of low-skilled foreign-labour policy, which mean that their availability is increasingly limited by the introduction of new foreign-worker levies as well as quota. This then compels employers to make the most efficient use of available local labour and encourage them to increase output per worker by introducing more innovate ways of production, such as using better technology.

Evaluation 1

Cost-push inflation, specifically wage-push inflation, will result from this policy because there will be few or no low-skilled foreign workers available to do jobs that Singaporeans usually avoid, such as those in construction or food and beverage industry. This then forces firms in these industries to employ local workers, who may demand higher wages. As a result, wage push-inflation occurs.

Evaluation 2

The above evaluation point assumes that Singaporeans are still willing to do the aforementioned jobs if they are paid higher wages. However, this is often not the case, since the prestige of an occupation is an important factor in making career choices in Singapore. Hence Singaporeans may still shun the job in the end and the companies are forced to uproot from Singapore, causing an outflow of capital and leading to a worsening of the country’s capital account of the BOP.

Point: The government should also employ educational policies in the sense that it can tweak the existing assessment-focused syllabus to become one that accommodates innovation and fosters creative thinking in students. However, this will enable the future workforce to be more creative and innovative, allowing future labour productivity to rise since a more creative labour force can devise more efficient methods of production.

Evaluation

The policy yields results only in the long term. Even then, the results are uncertain (not all students will be creative enough to devise new and efficient methods of production). Hence this policy is not suite for urgent problems such as decline in productivity levels.

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Value judgement

The government should employ policies as a collective effort, so that one policy can minimise the shortcomings of another. However, it is wise for the government to ensure that it does not take on the entire burden of subsiding programmes, such as education or upgrading programmes as it will worsen its fiscal situation. Moreover, the government should always review its goals, objectives and policies in order to adapt to the ever-changing economic situations faced by the country.

Raising labour productivity to achieve macroeconomic goals Point: Singapore can raise its labour productivity to achieve its macroeconomic

goals, as high-quality labour attracts more investments, causing the AD to rise as well as raising the AS, which means that Singapore gets to enjoy both actual and potential economic growth. The rising AS can also help to moderate inflationary pressures. Moreover, rising investment levels and the AD can help to counter the problem of cyclical unemployment. In addition, the influx of FDI can improve capital account and the BOP.

Point: The government can implement various policy tools to address the issue of falling productivity levels in Singapore. One of the policies they can adopt in the long-term supply-side policy of re-trainings and upgrading the skills of workers. This can be done through providing subsidies on training programmes like Workfare. This then enables workers to be more skilful in their jobs and thus improves the labour quality and productivity in Singapore.

Evaluation 1:

Some workers are unwilling to forego their current income to go for training. It may also take some time for workers to be trained before they can apply the skills learnt during training and hence is not a solution for urgent problems.

Evaluation 2

Increasing pressure to keep on upgrading oneself and the stress that may result from juggling part-time education and work may affect the labour situation in Singapore. In this case, the government’s policy to introduce upgrading may backfire instead and the productivity may fall due to mental stress in workers.

Evaluation 3

The inflow of FDI may not be solely determined by the quality of labour in one country but also by global economic circumstances. In the case of a severe global recession such as the 2008 global financial meltdown, firms may still refuse to invest even though a country has quality labour, as they project a pessimistic outlook on the global economic landscape.

Evaluation 4

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Raising labour productivity can also be considered a long-term measure. Hence it cannot be adopted as the sole solution to urgent issues such as imported recession or strong demand-pull inflationary pressures. Hence demand management policies may be more suitable for handling urgent issues compared to raising labour productivity.

Evaluation 5

Raising labour productivity may not be the best policy, as Singapore is a small and open economy that is reliant on the global economic landscape. Therefore, appreciating the Singapore dollar to counter cost-push inflation and boost export competitiveness is a more effective policy instead. Another policy that can be adopted can be in the form of the establishment of more free-trade agreements (FTAs) with more trading partners to boost export competitiveness.

Pros and Cons of Current Account Deficit Point: Current account deficit is usually undesirable for an economy because such a

deficit reflects a fall in net exports as well as the AD, indicating a fall in the real national income of the country.

Point: With a deficit in the current account, the supply of the country’s currency rises while demand for it falls. Hence, the country’s currency depreciates, leading to a decrease in foreign reserves. The utilisation of foreign reserves to intervene in the foreign exchange market may incur some opportunity cost for the country, as it can also be used to service its foreign debt, which continues to accrue interest.

Evaluation 1

A current account deficit is not always detrimental to the country’s economy. In the case of a developing country, a deficit in the current account may be an indication that the country is industrialising and thus importing a great quantity of modern machinery. This helps to increase productivity of the country and allows it to enjoy potential economic growth in the long run.

Evaluation 2

A current account deficit also be necessary if the country has just been struck by a natural disaster that has destroyed a large quantity of its factors of production. It has to import new factors. Hence the current account deficit. This case is clearly exemplified by Japan in the aftermath of the 2011 Tohoku Earthquake.

Value Judgement

Whether a current account deficit I a desirable for the country depends on the duration of the deficit and the cause of the deficit. If the deficit is temporary, especially in the as of recovery from a natural disaster, the deficit may still be deemed as desirable.

Benefits of a Healthy Balance of Payment

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Point: Having a healthy current and capital account is beneficial, as it is an indication that export revenue is greater than import expenditure. Since there is a positive value in net exports, the AD rises, allowing the economy to enjoy actual economic growth and rectifying the problem of cyclical unemployment.

Evaluation 1

A current account surplus may result in demand-pull inflation if the economy is producing near its full employment level. Moreover, if this surplus is caused by the under-valuation of the country’s currency, it may result in retaliation by other countries. The artificial and unfair export competitiveness created may also encourage domestic firms to be allocative inefficient.

Point: Having a surplus in the capital account may be beneficial for a country, as this means that it is enjoying an influx of FDI. This helps to boost the AD and the aggregate supply, allowing the country to achieve actual land potential economic growth.

Evaluation 1

If the surplus in capital account is caused by an influx of speculative capital, the effects may be undesirable for the economy. The influx of t money can cause demand for the country’s currency to rise, causing the currency to appreciate and the country’s exports to lose its competitiveness in the global market.

Evaluation 2

The influx of FDI may also cause local SMEs to shut down as they will be unable to compete with MNCs in terms of size, cost and efficiency.

Value judgement

Whether a constant surplus in the current and capital account is beneficial for the country depends on the circumstances faced by the country itself. If it is an open and small economy such as Singapore, with external demand taking up two0thirds of its D, it will not be beneficial for the country to maintain a persistent surplus in its current account as it may risk retaliation from its trading partners.

Policies to correct balance of payment deficit Point: An expenditure-reducing policy can be implemented to correct a BOP deficit.

The policy involves cutting down government expenditure or raising the corporate and personal income tax rate in a bid to reduce consumption, investments and public expenditure levels to reduce the AD. This then cause a fall in the real national income as well as the purchasing power of the people on imports. When the demand for imports fall, import expenditure falls resulting in improvements in the current account and the BOP.

Evaluation 1

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The success of such a policy depends on the income elasticity of demand of the country’s imports. If the country imports mainly necessities such as food, where demand is income inelastic, the fall in income only causes a less than proportionate fall in demand, which means that the effectiveness of this policy is limited.

Evaluation 2

This policy may come into conflict with government’s aim to attain sustainable economic growth as well as low unemployment levels.

Point: The government can also employ expenditure-switching policies to correct the BOP deficit. This involves the depreciation of one’s currency o that exports become more price-competitive while imports become more expensive in terms of the domestic currency. Net exports increase and the current account as well as the BOP improves.

Evaluation 1

In the short run, the J-curve effect and this policy worsens the current account, as demand foreparts and imports are price-inelastic due to response and contractual lag.

Evaluation 2

Depreciating the currency may also lead to imported inflation. This eliminates the price advantage gained through depreciation.

Point; The government can also sign more FTAs to attract FDI, as FTAs involve the free movement of capital between economies. The influx of FDI then improves the capital account and the BOP.

Evaluation

However, FTAs eliminate all import tariffs and this may lead to a rise in import expenditure which then worsens the current account tanned the BOP.

Value Judgement

Switching and reducing expenditure can be considered a short-term solution with adverse effects on other macroeconomic goals of the government. Hence in order to eliminate the problem entirely, a long-term supply-side policy must be engaged so that the economy becomes more innovative and the exports become more competitive.

Price-Elasticity Concepts in Deciding Government Policies Point Concepts of elasticity are relevant in determining the success of the

government’s policies. For instance, the government needs to consider the price elasticity of demand of exports and imports in adopting an exchange-based monetary policy in depreciating the country’s currency as the Marshall-Lerner Condition has to be fulfilled before net exports can rise.

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Evaluation 1

Knowledge of elasticity concepts does not always help government to make appropriate policies as it only assumes that one variable is changing. For example, in a recession, the depreciation of currency does not help to boost net exports as the real national income of many countries is falling. Because of this, the fulfilment of the Marshall Lerner Condition does not matter.

Evaluation 2:

Other factors have to be considered when the government has to sue currency depreciation as a monetary policy. For example, the proportion of the AD that is made out of external demand is also important in determining which monetary policy to adopt.

Point: The government has to consider the income elasticity of demand when considering the implementation of an expansionary fiscal policy that involves the lowering of the personal income tax rate. The income elasticity of demand determines the extent of rise in demand for different goods and services when the policy is adopted.

Evaluation

The government also has to consider the size of the multiplier when determining the success of this policy, especially the value of MPC.

Point: The government should also consider the price elasticity of demand in adopting policies to correct market failures. For instance, in the implementation of tax in order to address the problem of negative externalities generated by cigarettes, the rise in prices due to tax only results in a less than proportionate fall in quantity demanded as smoking is an ingrained habit.

Evaluation

Other factors may also limit the success of these policies such as the difficulty in measuring external costs, since externalities are unpriced effects.

Macroeconomic Policy: Expansionary monetary policy Point: The government can engage in expansionary monetary policy to achieve is

target of robust economic growth. This expansionary monetary policy with an interest-rate focus may involve lowering the interest rate in order to attract investments and encourage households to purchase big-ticket items of interest-sensitive items. Another form of monetary policy is the exchange-rate based monetary policy which involves the depreciation of one’s currency to boost net exports and AD.

Evaluation

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The Singapore government has chosen to adopt an exchange rate-based monetary policy in order to achieve its goals because many consumer goods in Singapore are imported. Hence import prices have a huge impact on inflation rate in Singapore. Another reason is that Singapore’s exports have high import content, so the prices of imported raw materials have a huge bearing in determining the country’s trade competitiveness. Lastly, as a financial centre, there is little restriction on capital flows in and out of Singapore. As a result, small changes in the difference between domestic and foreign interest rates can lead to a large and quick movement of speculative capital and this may be destabilising for Singapore’s economy. Hence an exchange rate-based monetary policy is preferred. An example of Singapore’s expansionary policy is the “Zero appreciation stance” of the SGD during the 2008-2009 subprime mortgage crises.

Macroeconomic Policy: Expansionary Fiscal Policy

Point: The government can adopt an expansionary fiscal policy to boost its AD to tackle the problems of recession. This is done by lowering personal income and corporate tax rates as well as boosting public expenditure , causing a rise in consumption, investments and government expenditure levels (C+I+G) and eventually a rise in AD>

Evaluation 1

The effectiveness of expansionary fiscal policy may be limited because of Singapore’s small multiplier size, due to its high MPM and MPS.

Evaluation 2

There are other determinants that influence the firms’ investment decisions other than the corporate tax rate. In the case of a severe global recession, firms may still refuse to invest even though the country has quality labour as their outlook on the global economic landscape is pessimistic.

Evaluation 3

An expansionary fiscal policy may not be the best policy for Singapore as its domestic demand takes up only a third of its D. In a global economic recession, a fall in AD is more likely to be caused by a severe fall in net export, which is not addressed by this policy.

Evaluation 4

Over-spending on public projects may worsen the government’s fiscal situation and result in opportunity costs. In the worst case it may even result in government debt as seen in the USA.

Point: Long-term supply-side policies such as the re-training and upgrading of workers (through programmes such as SPUR and workfare) seem to be a better choice, this boosts the aggregate supply, allowing for both actual and potential economic growth to be enjoyed by the country.

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Evaluation for retraining 1:

Some workers are unwilling to forego their current income to go for training. It may also take some time for workers to be trained before they can apply the skills learnt during training and hence is not a solution for urgent problems.

Evaluation for retraining 2

Increasing pressure to keep on upgrading oneself and the stress that may result from juggling part-time education and work may affect the labour situation in Singapore. In this case, the government’s policy to introduce upgrading may backfire instead and the productivity may fall due to mental stress in workers.

Point: The government can depreciate the Singapore dollar as a part of its expansionary monetary policy. This may help to boost export competitiveness and raise export revenue, while making imports more expensive in domestic currency terms and increasing net exports which causes a rise in the AD, assuming that the Marshall Lerner condition is met.

Evaluation 1

The rise in AD may result in demand-pull inflation (which comes into conflict with other macroeconomic goals)

Evaluation 2

The demand for exports may be price-inelastic in the short run due to the fact that it may take some time for trading contracts between firms to expire before they can respond to a change in the exchange rate.

Evaluation 3

Consumers also need time to adjust their taste and preferences after a change in exchange rate.

Value Judgment 1

Every policy has its strong points and shortcomings. The government should adopt policies according to the circumstances faced by the economy as well as the urgency of the problem. For example, urgent problems are better addressed using demand management policies than long-term supply-side policy.

Value Judgement 2

Traditional fiscal policies that aim to boost domestic demand are not suitable for Singapore due to tis small domestic demand size and the nature of the recession (caused by the global financial crisis), which means that a fall in AD will most likely to be caused by a fall in net exports. In addition, the government should employ policies as a collective effort so that one policy can balance the shortcomings of another. Moreover, the government should

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always review its goals, objectives and policies in order to adapt to ever-changing economic circumstances faced by Singapore.

Factors leading to unemployment Point: there are many factors that lead to the rising levels of unemployment in a

country, one of which being imported recession that causes the AD to fall, and in turn causes rising levels of cyclical unemployment.

Point: Another factor that can lead to rising levels of unemployment is the occupational mobility of labour. For example, this occurs due to the loss of comparative advantage of the USA in the production of low value-added consumer goods to China. This then causes the demand for labour that produces these goods to fall, and the workers involved have to be retrenched. However, these workers do not have skills required to be employed in a sunrise industries such as the healthcare or life sciences industries. Hence occupational mobility leads to rising levels of structural unemployment.

Evaluation

In order to counter rising levels of structural unemployment, the government may employ policies such as the long-run supply-side policy of re-training of workers. This equips workers with the relevant skills to be employed in sunrise industries.

Point: Another factor that can contribute to the rising levels of unemployment in a country is the increasing levels of agitation by strong trade unions that ask for wage raises that outstrip the rise in labour productivity. Hence there is a surplus of workers, since the demand for the workers at that wage level will fall, leading to a case of rising classical unemployment.

Evaluation

However, in countries such as Singapore, classical unemployment is highly unlikely to occur as wage increases are monitored by the National Wages Council.

Value Judgement

The main type of unemployment that occurs in a country depends on the characteristic of and circumstances faced by its economy. In the case of developed countries such as the USA, the UK or Singapore, structural unemployment may be the most prevalent types of unemployment as they lose their comparative advantage to emerging economies such as China and India.

Macroeconomic Goals: Pros and Cons of Economic Growth Point: economic growth in beneficial to a country because the rising real national

income, as reflected in actual economic growth, means that people can afford greater quantity of goods and services, allowing them to enjoy better material standard of living.

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Point: economic growth is beneficial t oak country as actual economic growth helps to reduce unemployment levels, leading to a reduction in the number of social issues such as crime. This then increase the non-material standard of living of the people.

Point: Moreover, a rising real national income means that the government’s tax revenue from personal income tax rises, as people pay higher taxes. These monetary resources can be utilised to tackle the problem of the widening income disparity by increasing funding on welfare services as well on the provision of merit goods such as education to the poor.

Evaluation 1

However, if the economy is operating in the intermediate or classical range, an increase in real national income only results in demand-pull inflationary pressures. Thus economic growth is always beneficial to the country.

Evaluation 2

Furthermore, if economic growth is a result of rising net exports due to the exploitation of comparative advantage of the economy, there will be cases of structural unemployment .There will be a fall in the demand for labour that produces goods that do not give the economy a comparative advantage.

Evaluation 3

Economic growth is accompanied by rapid industrialisation. This often involves exploitation of natural resources of the country. If the exploitation is done in an excessive manner, there will be environmental degradation and the non-material standard of living of the people may fall.

Evaluation 4

Economic growth also changes the lifestyles of people. Often, people eared accustomed to hectic lifestyles and have no time for inter-personal relationships, even among family members. This stress, coupled with a lack of meaningful social interaction, may cause non-material standard of living of people to fall.

Value Judgement

Whether a country can fully benefit from economic growth depends on the ability of its government to adopt the right policy to minimise the risks and adverse effects that come with economic growth. For example, a long-term supply-side policy ensures that there is economic growth at a non-inflationary pace.

Economic Growth as the Priority Macroeconomic Goal Point: The pursuit of economic growth as the primary policy of the government may

be appropriate because actual economic growth means that there is an improvement in the material standard of living of the population. Moreover, unemployment levels will fall land there will be fewer cases of crime and other social

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issues, improving the non-material standard of living of the people. Potential economic growth also ensures non-inflationary economic growth, which his sustainable in the long run,

Point: The pursuit of economic growth as the primary macroeconomic goal of the government may also be beneficial if it is done through ha depreciation of the country’s currency, allowing net exports to rise while improving the current account and the BOP.

Evaluation 1

However, the pursuit of economic growth may cause demand-pull inflation if actual economic growth increases at a much rapid rate than potential economic growth.

Evaluation 2

The pursuit of economic growth through increasing export competitiveness and net exports mean that the country has to produce goods in which it has a comparative advantage. This cause’s structural unemployment as the labour in industries in which the country does not have comparative advantage becomes redundant.

Evaluation 3

In the case of a developing country, if economic growth is achieved through investments, the current account of the country may worsen as developing countries may need to import complex machineries from developed economies.

Evaluation 4

Economic growth eventually causes a widening income disparity in the country as economic growth yields more benefits to those who own a larger proportion of the country’s factors of production.

Evaluation 5

In some countries, especially developing ones, achieving economic growth marks the arrival of industrialisation of the economy. This may result in greater pollution and increasing cases of work-related stress in the country. AS a result, the non-material standard of living of the people fall, and thus the achievement of a sustainable economic growth should not be the primary macroeconomic goal for the government.

Value Judgement

The government should not pursue rapid economic growths at all costs, since it may have adverse effects. The government should instead implement a combination of demand-management policies and long-term supply-side policies so that the benefits of economic growth can be maximised and its adverse effects minimised.

Low unemployment as the Priority Macroeconomic Goal

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Point: Low unemployment levels should be the primary macroeconomic goal for the government as the achievement of low unemployment levels also involves policies such has the expansionary fiscal or monetary policy, which also helps the country to achieve higher real national income. Hence, with low unemployment levels, the economy can enjoy actual economic growth and higher material standard of living for its people.

Point: Addressing the problem of unemployment is an important macroeconomic goal as with rising unemployment, government revenue from personal income tax falls, rendering the government unable to support policies such has welfare programmes in turn increasing the widening income inequality.

Point: If a higher unemployment rate persists, there will be increasing incidents of crime and other social problems such as domestic violence. This then lowers the overall non-material standard of living of its citizens.

Point: If the unemployment is structural in nature, which means that unemployed labour is not doing productive work over long periods, the unemployed labour will be unmotivated and de-skilled in the long term, adversely affecting the productive capacity of an economy, causing the aggregate supply to fall.

Evaluation 1

However, the government may not want to consider low unemployment level as the primary macroeconomic goal of the government, since low cyclical unemployment levels result in the utilisation of expansionary fiscal or monetary policies, which the results in the utilisation of expansionary fiscal or monetary policies, which then results in an excessive rise in the AD and increasing demand-pull inflationary pressures. This means that the government’s goal of having low unemployment will be in conflict with the goal of achieving price stability in the economy.

Evaluation 2

Moreover, the government’s goal to achieve low unemployment may also come into conflict with the goal of a healthy BOP. Low unemployment levels require a rise in the AD and the real national income of the people. However, this causes their purchasing power on imported goods to rise. When the demand for imported goods rise, the import expenditure rises as well, causing the worsening of the current account and potentially the BOP.

Value Judgement

Whether low unemployment levels should be the primary macroeconomic policy of the government depends on the prevailing economic circumstances of the country. If the country is facing severe recession and high unemployment levels, low unemployment levels will be considered as the primary macroeconomic goal because efforts to achieve it, such as the expansionary demand management policies, will also help to get the country out of recession.

Low Inflation as the Key Macroeconomic Goal

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Point: Price stability should be pursued as the main macroeconomic goal of the government because it helps to achieve the other three macroeconomic goals of the government.

Point: A low domestic rate makes a country’s exports more price-competitive if it is lower compared to the inflation rate of other countries, as the price of its goods and services rise at a slower rate compared to those in other countries, making it relatively cheaper in foreign markets. This means that export revenue of the country will rise. When net export rise, the AD rises as well. Hence the country can achieve actual economic growth and improve its current account and BOP. This also reduces the unemployment levels of the country.

Evaluation 1

However, if price stability is achieved through the implementation of a contractionary fiscal or monetary policy, there will be a fall in the AD and there will be a fall in the real national income of the country. Furthermore, unemployment levels will rise. Hence in this case, low inflation should not be the primary goal of the government.

Evaluation n2

Furthermore, if low inflation is achieved by appreciating one’s domestic currency, the current account of the country and its BOP may worsen as exports of the country are more expensive in foreign currency terms and export revenue falls.

Value Judgement

Whether price stability should be the primary macroeconomic goal of the government depends on the current circumstances faced by the economy. For example, if the country is currently facing high inflationary pressures, the government should address the most urgent problem first, which is inflation.

Macroeconomic policies to Curb Rising Cost-push inflation Point: A short-run supply-side policy can be used to address the problem of wage-

push inflation and moderate inflationary pressures by keeping labour costs low. The NWC can recommend such a policy.

Evaluation 1

Companies may heed the advice of the MWC to limit the pay rise of employees for fear of creating low morale among their employees.

Evaluation 2

NWC recommendations are merely suggestions and are not enforceable by law. Hence firms are not compelled to abide by the g guidelines on wage increases.

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Point: A long-term supply-side policy can also be used to moderate inflationary pressures since it raises the aggregate supply and the productive capacity of the country.

Evaluation 1:

Some workers are unwilling to forego their current income to go for training. It may also take some time for workers to be trained before they can apply the skills learnt during training and hence is not a solution for urgent problems.

Evaluation 2

Increasing pressure to keep on upgrading oneself and the stress that may result from juggling part-time education and work may affect the labour situation in Singapore. In this case, the government’s policy to introduce upgrading may backfire instead and the productivity may fall due to mental stress in workers.

Point: The Singapore government may appreciate the Singapore dollar to moderate cost-push inflation because Singapore is dependent on imports for its raw materials.

Evaluation

If the Singapore dollar appreciates excessively, there will be the undesirable effect of redoing Singapore’s international cost competitiveness as a business location. This then causes an outward FDI by Singapore firms and a diversion of FDI projects by foreign firms, causing investment levels to fall. There will also be the problem of availability of reserves if the government continues with this policy.

Value judgement

Government policies have to undergo routine reviews and fine-tuning in order to achieve the desired results as the economic circumstances of a country may change, especially in a small and open economy, which may be more vulnerable to ever-changing global economic trends. However, it would seem that for now, the appreciation of the Singapore dollar is the most appropriate policy as the country is dependent on imports for its consumer goods and raw materials .With the rising prices of goods and fuel, such a policy may be the most appropriate.

Macroeconomic Policies: Expansionary fiscal policy vs Monetary Policy

Point: Expansionary fiscal policies and exchange-based expansionary monetary policies can reduce the level of cyclical unemployment since both of them result in the rise of the AD and hence, increasing actual economic growth.

Evaluation 1

The effect of an expansionary fiscal policy may be limited because of Singapore’s small multiplier size, due to its high MPM and MPS.

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Evaluation 2

Many other determinants influence rims’ investment decisions other than corporate tax rate. In the case of a severe global recession such as the 2008 global financial meltdown, firms may still refuse to invest even though a country has quality labour, as the outlook on the global economic landscape is pessimistic.

Evaluation 3

An expansionary fiscal policy may not be the best policy for Singapore as its domestic demand takes up only a third of its AD. In a global economic recession the fall in the AD is more likely to be caused by a severe fall in net export, which is not addressed by this policy.

Evaluation 4

Over-spending on public projects may worsen the government’s fiscal situation.

Point: The government can also depreciate the Singapore dollar to raise net exports and it’s AD. This then causes the real national income to rise and cyclical unemployment levels to fall.

Evaluation 1

The rise in the AD may result in demand-pull inflation (which conflicts with other macroeconomic goals of the government).

Evaluation 2

The demand for exports may be price-inelastic in the short run as it takes time for trading contracts between firms to expire before they can respond to a change in the exchange rate.

Evaluation 3

Consumers also need time to adjust their taste and preferences after changes in the exchange rate.

Point: Long-term supply-side policies such as subsidies for training and upgrading of workers’ skills can reduce the level of structural unemployment as redundant workers can be equipped with skills in demand in the sunrise industries.

Evaluation 1

Some workers may be unwilling to forego their current income to go for training. It also takes time for workers to be trained before they can apply the skills learnt during training. Hence it is not a feasible solution for urgent problems.

Evaluation 2

Increasing pressure to keep on upgrading oneself and the stress that may result from juggling part-time education and work may affect the labour situation. In this case, the

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government’s policy to introduce upgrading may backfire instead and productivity may fall due to mental stress in workers.

Value Judgement

The typo policies that the government should adopt to address the problem of unemployment depends on the type of unemployment that is most prevalent in the country. In Singapore, structural unemployment seems to be more prevalent as the production facilities of low value-added goods are relocating out of Singapore in search for cheaper labour.

Expansionary Fiscal policies vs Monetary Policies in Singapore Point: Fiscal policies may be more effective than monetary policies in addressing the

effects of an imported recession in Singapore. Besides raising the AD through lowering corporate and personal income tax, fiscal policies also involve the government spending on training and R&D to boost the productive capacity of the country, thus improving the LRAS and achieving sustainable non-inflationary growth.

Evaluation 1

However, the effect of fiscal policies may be limited due to the small multiplier size in Singapore. This is because of the high MPM and MPS in Singapore.

Evaluation 2

The government may face a worsening fiscal situation as it may have to commit public funds to long-term projects such has R&D and training.

Point: Exchange rate-based monetary policies may be more effective than fiscal policies in addressing imported recession because Singapore is a small and open economy and external demand makes up most of its AD. Hence the zero appreciation instance of the SGD can raise net exports and hence cause a greater rise in the AD compared to an expansionary fiscal policy,

Evaluation

Singapore’s exports have very high import content .Hence the appreciation of the Singapore dollar may be a more appropriate policy. IF depreciation occurs, the price of imported raw materials will rise and the unit cost of production of Singapore exports will also rise, negating its rising price competitiveness due to the depreciation in the Singapore dollar.

Value Judgement

The best policy seems to be an expansionary policy with supply-side focus as both expansionary fiscal and monetary policies seem to be short-term solutions that are countercyclical in nature. However, if the government wants to ensure long-term economic growth at a non-inflationary pace, a fiscal policy with a supply-side focus is the best policy to be adopted.

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Conflicting Macroeconomic Goals: Inflation vs Unemployment

Point: Addressing high and rising inflation is more important than addressing the problem of unemployment. High and rising inflation cab have severe adverse effects on the export competitiveness of a country’s goods. If external demand makes up most of the c country’s AD, inflation can cause the AD to fall.

Point: Furthermore, if net exports fall due to the loss of export competitiveness, the current account and the BOP will worsen. IT is possible then for the country to suffer from a deficit in its BOP when this persists.

Point: Foreign investors will redirect their FDI out of the country if there is high and rising inflation since the presence of fluctuating prices and inflation rates can erode the certainty in revenue gained and cost needed. Hence investors may be hesitant to invest in the country. This then causes the capital account to worsen as well as investment levels to fall, resulting in the aggregate supply to fall.

Evaluation 1

Addressing the problem of unemployment is still more important as with rising unemployment ,government revenue from personal income tax will fall, rendering the government unable to support policies such has welfare programmes and resulting in widening income inequality.

Evaluation 2

The government also needs to provide welfare for its unemployed if unemployment remains high and unresolved. This incurs opportunity costs as subsidies and welfare benefits for the unemployed could have been put to better use, such as building better infrastructure to improve its productivity level of the economy in the long run.

Evaluation 3

Moreover, if a high unemployment rate persists, there will be increasing incidents of crime and other social problems such as domestic violence. This then lowers the overall non-material standard of living of its citizens.

Evaluation 4

IF the unemployment is structural in nature, which means that the unemployed labour is not doing productive work over long periods, the unemployed labour will be unmotivated and de-skilled in the long term, adversely affecting the productive capacity of the economy and causing the aggregate supply to fall.

Value Judgement

Conflicts between the government’s goals and objectives are inevitable. Hence the government should employ policies as a collective effort so that one policy can counter the

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shortcomings of another. Moreover, the government should always review its goals, objectives and policies in order to adapt to ever-changing economic circumstances.

Conflicting Macroeconomic Goals: Economic Growth vs Healthy Balance of Payment

Point: IF the Singapore government wants to achieve economic growth, it may have to employ expansionary fiscal policies to boost its AD and real national income. However, as real national income will rise due to such policies, the demand for imported goods rises as well. Hence its current account and BOP may worsen and there may be a conflict between the government’s objective to achieve sustainable economic growth and the goal to maintain a healthy BOP.

Point: There may be conflicts between the government’s goal of achieving robust economic growth and price stability. When the AD rises and the economy is operating in the intermediate range, there are demand-pull inflationary pressures on the economy.

Point: There may also be conflicts between the government’s goals of achieving low unemployment levels and robust economic growth. If a rise in real national income is achieved by harnessing its comparative advantage, the demand for labour in industries in which the country does not have comparative advantage will fall. Hence structural unemployment will rise.

Evaluation 1

There is no conflict between the government’s goal of having robust economic growth and price stability. If the government employs long-term supply-side policies to achieve both actual and potential economic growth, its aggregate supply will rise and inflationary pressures in the economy will be moderated.

Evaluation 2

There is no conflict between the government’s goal of having robust economic growth and healthy BOP, as the adoption of a long-term supply-side policy to boost growth lowers the unit cost of production of the country’s exports. Hence exports will be more price-competitive in global markets and the current account and BOP will improve. Moreover, a rising real national income also means that there are lower levels of cyclical unemployment.

Value Judgement

Whether the government’s goals will conflict with each other depends on the circumstances of the economy as well as the policy decisions of the government. However, achieving the four macroeconomic goals without conflict can only be realised in the long run when the government implements long-run supply-side policies. In the short run, the implementation of counter-cyclical demand management policies will result in conflicts of the government’s macroeconomic objectives.

The effect of Undervalued Currency on Macroeconomic Goals

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Point: The under-valuation of a currency may help to achieve robust economic growth as exports of the country becomes more price-competitive in the global market, causing net exports and its AD to rise, assuming that the Marshall-Lerner Condition is met. This also helps to address the problem of cyclical unemployment.

Point: If this occurs, the current account of the BOP will also improve and the country can enjoy an improvement in its BOP.

Evaluation 1

The under-valuation of a currency accuses the AD to rise and in turn causes demand-pull inflation if the economy is already producing near its full-employment level. This means that the macroeconomic goal of low inflation is not fulfilled with this policy.

Evaluation 2

Moreover, the under-valuation of a currency may invite retaliation from other countries if it proves to be persistent .This means that net exports may not rise as other countries may depreciate their currencies as well.

Evaluation 3

There are more effective ways to fulfil the macroeconomic goals of a government such as using an expansionary fiscal policy with a supply-side focus. This helps to achieve actual and potential economic growth at a non-inflationary rate. It also addresses the problem of cyclical and structural employment while still maintaining a healthy BOP as the labour force is more productive due to training and the unit cost of production of exports falls, making the country’s exports more price-competitive in the global market.

Small and Open Economies Point Singapore’s decisions regarding its macroeconomic polies are influenced by its

characteristics of being a small and open economy.

Evaluation 1:

The Singapore government has chosen to adopt an exchange rate-based monetary policy in order to achieve its goals. Many of the consumer goods that are consumed in Singapore are imported and hence import prices have a huge impact on the country’s inflation rate. Another reason is that the country’s exports have high import content so the prices of imported raw materials have a huge bearing in determining its trade competitiveness. Lastly, as a financial centre, there is little restriction on capital flows in and out of Singapore. As a result, small changes in differences between domestic and foreign interest rates can lead to large and quick movements of speculative capital, which may be destabilising f or Singapore’s economy. Hence an exchange rate-based monetary policy is preferred. An example of Singapore’s expansionary policy is the zero appreciation instance of the Singapore dollar during the 2008-2009 subprime mortgage crises.

Evaluation 2

The fact that Singapore’s economy is a small and open one means that the Singapore government should adopt an expansionary fiscal policy with a supply-side focus when

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implementing fiscal policies. Being small and open, Singapore has a high MPM and MPS, which leads to a small multiplier size and thus may hinder the effectiveness of an expansionary fiscal policy. Hence the government should implement a fiscal policy with a supply-side focus instead to ensure that the country can enjoy sustainable economic growth in the long run at a non-inflationary pace.

The Multiplier Size IF there is arise in the levels of spending by consumers and firms, the AD of the

economy will rise. As the consumption and investment levels of the economy rise, the AD rises causing firms to experience a fall in their inventories. Hence firms are signalled to step up production levels. They do so by hiring more workers to raise output, causing income levels of people in the economy to rise and unemployment levels to fall. Due to the rising income levels, household spending causes a rise in the income of other groups in the economy as demand for goods and services they produce rises. This then triggers the multiplier effect in which there are multiple rises in the economy’s production, output and real national income.

Evaluation

However, in a small land open economy such as Singapore, the multiplier effect is limited since Singapore has a small multiplier size. This is brought about by large MPS due to implementation of a compulsory savings plan known as the CPF as well as high MPM as Singapore has no natural resources and has to depend on imports for consumer goods and raw materials.

Point: spending by firms on capital goods, which can be considered as investments, also has its effects on the aggregate supply of the economy. When investment levels of firms increase, the capital quantity of the country in the form of machineries and factories rises. This then causes the productive capacity of the economy to rise, resulting the aggregate supply rising. Assuming that the AD stays constant the economy is operating on the intermediate range, this allows the economy to enjoy actual economic growth and a rise in real national income, along with the potential economic growth yielded by a rise in the aggregate supply.

Value judgement

Generally a rise in firms’ spending is preferred to the rise in consumers spending. Firms’ spending in the form of investments has a greater impact on economic growth, especially in the long run as rising investment levels allow the economy to grow sustainably at a non-inflationary pace due to the rise in the productive capacity in the economy as well as the aggregate supply.

Should Singapore focus on Internal Demand to Reduce External Shocks?

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Point: Singapore should move away from an export-driven economy and rely on internal demand to support its economy instead as Singapore is overly prone to external shocks. Hence the government should focus on driving the economy through increasing consumption and investments instead. This instils confidence in investors and consumers alike so that Singapore is no longer prone to external shocks and in turn they consume and invest more, driving the AD and economic growth further.

Evaluation 1

Singapore is a small and open economy with external demand making up two-thirds of its AD. Boosting consumption and investment levels through expansionary fiscal policy may not propel Singapore’ economy as much as an export-drive strategy.

Evaluation 2

The effectiveness of an expansionary fiscal policy may also be hindered by the country’s small multiplier size due to its large MPM and MPS value,

Evaluation 3

Instead of neglecting an export driven strategy, Singapore should maintain this strategy while diversifying its exports market. It may negotiate for more FTAs with emerging markets. Hence even when the USA or Europe is in a recession, Singapore can still rely on the increasing demand for its exports in these emerging markets. Singapore should also work on finding its comparative advantage in order to maintain its export competitiveness.

Value Judgement

Singapore should not turn away from an export-driven strategy since its domestic consumption is too small to absorb its own produce. Hence the country should just diversify its exports market in the region through cooperation with organisations such as ASEAN as well as further negotiations with emerging markets such as Brazil, Russia and China.

Degree of openness of an economy and the priority Macroeconomic Goal

The degree of openness of an economy determines the primary macroeconomic goals of its government This is because, for example, in the case of an open economy, the primary goal is to achieve a healthy BOP as an open economy has as proportionately larger external demand as part of this AD> Hence an improvement in the current account due to rising net exports and an improvement in the BOP means that there is a substantial rise in the AD and real national income. Moreover, unemployment levels may fall as well. Hence, for an open economy, a healthy BOP is the primary macroeconomic goal because if this particular goal is achieved, the other macroeconomic goals will be fulfilled as well.

Evaluation 1

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A country’s choice of macroeconomic priority is not always determined by the degree of openness of the economy. There may urgent circumstances facing the economy currently. For example, the country may be afflicted with a severe recession and high unemployment levels. In such cases, it may be best to focus on employing counter-cyclical demand management policies to address this urgent problem first.

Evaluation 2

Regardless of the degree of openness of the economy, every country’s objective is to achieve robust and sustainable economic growth at a non-inflationary pace in the long run. Hence, in the long run, the primary objective of countries is t achieve robust economic growth at a non-inflationary pace.

Value Judgement

The choice of primary macroeconomic goal of the government depends on many factors and not only the degree of openness of the economy. Ultimately, the government has to take all of these factors into account in crafting and deciding its primary macroeconomic goal. All the government’s plans has to be reviewed periodically to ensure that the primary goal is still the most suitable for the economy given the ever-changing circumstances that economies face.

Degree of Openness and the Effect of Recession Point: The degree of openness of an economy is important in determining he effect

of a global recession towards the country, such as the 2008 global financial meltdown. If country is an open economy, which is very dependent on trade, it will be vulnerable to a severe imported recession in an event of a global economic crisis, as net exports, which make up a large part of its AD, will fall severely, causing real national income to fall.

Evaluation 1

However, the degree of openness is not the only factor that determines the effects of a global recession on a country. The size of the multiplier of the country also determines the effects of a global recession on the country. If the multiplier size is large, due to a small MSP, the effects of a global recession will be more severe, since the reverse multiplier effect is also larger in magnitude when the AD falls, causing real national income to fall drastically by multiple times.

Evaluation 2

The ability of the government to implement counter-cyclical demand management policies such as expansionary fiscal or monetary policies also determines whether the country will be severely affected by a global recession.

Evaluation 3

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The trade pattern of a country also matters in determining the effects of a global recession on the country. If the country’s largest trading partners are those who are also severely affected by the crisis, such as the USA, the effects of the global recession will be more severe as net exports and the AD will fall sharply.

Singapore vs Large Economies: Effects of Increased interest Rates

Point: An increase in the interest rate matters in determining the effects of a global recession on the country. If the country’s largest trading partners are those who are also severely affected by the crisis, such as the USA, the effects of the global recession will be more severe as net exports and the AD will fall sharply.

Singapore vs Large Economies: Effects of Increased Interest Rates

Point: An increase in the interest rate may have different effects on large and small as well as open economies. It may cause a fall of consumption, investments and net exports level.

Evaluation 1

However, for a small and open economy like Singapore such as Singapore. The effect of a fall in investment levels due to a rising interest rate may not be as severe as that in large and closed economy like China. The source of investments in Singapore are mostly FDI, and these MNCs do not have to borrow money locally to fund their investments as they are funded by their parent company.

Evaluation 2

A rising interest rates also has limited impact on consumption levels in Singapore as consumers in Singapore do not have a habit of purchasing goods and services with credit. Instead, they use their past savings since the Asian culture emphasises thrift and savings.

Evaluation 3

Moreover, due to the high MPM and MPS, the multiplier size of Singapore is small and thus falling consumption, investments and net exports level may not cause a fall in real national income that is as severe as what would be experienced by large economies such as the USA, which has a large multiplier size.

Value Judgement

The circumstances that country faces during an interest rate hike also determine the severity of the effects of the hikes. If the country’s economy is operating in the classical range, such as in the case of Japan, a fall in AD may not even cause any fall in real national income. However, if the country’s economy is operating in the Keynesian range, a fall in real national income may be extremely severe when there is a rise in the domestic interest rate.

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Singapore vs Large Economies: Effects of Lower Domestic Interest Rates

Point: Both large and small economies may benefit from a lower domestic rate, as the lower rate raises the investment and consumption levels in the country. This then causes the AD to rise and firms experience a fall in their inventories. Hence they are signalled to step up production levels. They then do so by hiring more workers to raise output. This causes income levels of the people in the economy to rise and unemployment levels to fall. Due to the rising levels, household spending also rises. AS one’s spending becomes another’s income, the rising household spending causes a rise in the income of other groups in the economy, as demand for the goods and services them produce rises. This then triggers the multiplier effect, in which there are multiple rises in the economy’s production, output and real national income.

Evaluation 1

However, the extent of benefits enjoyed by the two economies may differ. For example, in a large economy such as the USA, the AD is made up mostly of domestic demand while in small economies such as Singapore the AD is made up mostly of external demand. Hence rising investments and consumption levels cause a large increase of the AD in large economies compared to small economies, as the size of the multiplier is bigger in larger economies compared to that in smaller economies.

Evaluation 2

The extent of increase in the level of investments may also be larger in large economies in the case of a lower interest rate. This is because in small and open economies such as Singapore, investments are mainly undertaken by foreign firms, which have their own sources of funding from their parent firms and they are unlikely to borrow from local banks to finance their investment projects. Thus lower domestic interest rates may not affect foreign firms in deciding whether to invest in local firms.

Evaluation 3

Small economies such as Singapore suffer more from the adverse effects of a lower interest rate. Lower interest rates may cause capital flight from the country, which in turn causes the Singapore dollar to depreciate. Since Singapore is import-dependent, a weaker dollar causes imported consumer goods and raw materials to be more expensive in dollar terms and this brings about cost-push inflationary pressures.

Value judgement

In conclusion, the extent of benefits that can be reaped through a lower interest rate differs from country to country. The extent of benefits reaped depends on various factors such as the characteristics of the economy as well as the current circumstances of the economy.

Singapore’s Policies vs The Policies of Large Economies

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Point: The Singapore government can adopt the same policies as large economies in order to achieve a sustainable economic growth rate. Examples of such policies include expansionary fiscal policies. These are especially useful when Singapore is faced with recession.

Evaluation 1

The Singaporean economy is small and open, in which domestic demand makes up only a small part of the AD. Hence it may not be wise for the Singapore government to pursue the same policies such as large economies in achieving its macroeconomic goals. Instead, it may be more effective to implement expansionary fiscal policies with a supply-side focus, such as investing government expenditures in building better infrastructure and education. This not only creates demand in the short run but also improves on productivity levels in the long run.

Evaluation 2

The effectiveness of expansionary fiscal policies are hindered by the small multiplier size of Singapore as the country has a high MPS and a high MPM.

Evaluation 3

The Singapore government cannot employ an interest rate-based expansionary monetary policy because Singapore is a regional financial hub and thus there is no restriction of the flow of speculative capital. Hence the difference between Singapore’s domestic interest rate and that of major economies around the world may lead to massive inflows and outflows of hot money, destabilising the country. Hence the MAS utilised an exchange rate-based expansionary monetary policy by adopting a zero appreciation stance in the Singapore dollar in 2008 financial crisis.

Point: Both Singapore and other large economies around the world still need to implement long-term supply-side policies in the form of training and upgrading of workers’ skills as well as providing grants for R&D to boost productive capacity.

Value Judgement

Whether large economies and small and open economies can implement the same economic policies depends on current economic circumstances as well as the decision-making process of their respective governments. If small and open economies are struck by an imported recession, they will still be compelled to use expansionary fiscal policies, albeit to a limited extent.

Protectionism Point: Protectionist measures such as tariffs can be used to address the problem of

unemployment. With tariffs placed on foreign-made goods, the demand for the same but locally made goods rises, due to its cheaper prices. Hence this causes demand for the labour that produce the domestic good to rise as well.

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Michael Lohh

Point: As local industries earn higher revenues and higher profits, assuming no change in cost, they may be more motivated to increase their investment. This rise in investment leads to a rise in the AD and increase economic growth as well, further reducing unemployment.

Evaluation 1

Imposing tariffs may induce retaliation from trading partners, and this negates any benefits of behaving tariffs in the first place. Even worse, it may result in a trade war

Evaluation 2

The success of such a policy depends on the price elasticity of the demand of the imported goods as well as the degree of suitability of the imported goods with locally made goods. If the demand for the imported goods is price-inelastic and the locally made goods are not good or close substitutes of their foreign-made counterparts, the effectiveness of the policy may be hindered.

Evaluation 3

If tariffs are placed on raw materials that are necessary for production, such as steel, the cost of production will rise and cost-push inflationary pressure will set in

Evaluation 4

Other undesirable effects of protectionism include the loss of consumer welfare. Resources used to protect inefficient domestic producers not only encourages firms to become more complacent but also distorts their comparative advantage, creating a deadweight loss to society, as consumers end up paying higher prices for goods produced at lower efficiency.

Value Judgement

Using tariffs to address the problem of unemployment s hold only be viewed as a short-term solution, as trading partners may retaliate against the tariffs. A more feasible way of reducing unemployment with minimal adverse side effects would be embark on a long-term supply-side policy to train the labour force. Unemployment problems that has been plaguing developed economies such as Singapore’s seem to be structural in nature, and hence a long-term supply-side policy is the best policy to use against it.

Effect of High MPS Point: High household savings have detrimental effects to the economy. When

savings levels rise, consumption levels fall. The AD then falls and real national income may also fall. This also causes unemployment levels or rise.

Point; During a recession, high savings levels hinder the state’s efforts to implement counter-cyclical demand management policies, such as expansionary fiscal policies, as a high savings rate result in a small multiplier size. Hence the effectiveness of these policies is hindered.

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Michael Lohh

Evaluation 1

However, if this occurs, there will be moderation on the demand-pull inflationary pressures in the economy.

Evaluation 2

Increasing savings increases the supply of loanable funds, causing the domestic interest rate to rise. Both the AD and aggregate supply also rise and the economy is then able to enjoy both actual and potential economic growth.

Evaluation n3

Lower interest rates drive speculative capital out of the country, and this causes the country’s currency to depreciate. This then boosts the price competitiveness of the country’s exports, and while export revenue rises, the import expenditure falls as imported goods become more expensive in domestic currency terms. Net exports rises, assuming that the Marshall-Lerner Condition is met. The AD rises and the country gets to enjoy actual economic growth. This also causes improvements in the current account and BOP.

Effects of a high MPS on Singapore

Point: After the subprime mortgage crisis in 2008, Singaporeans are saving more of their income for fear of another crisis that may result in the loss of their source of income. However, it is feared that a higher MPS may adversely affect the government’s effort to address the problem of imported recession.

Point: With a higher MPS, consumption levels fall and this causes the AD to fall. This then causes the real national income to fall and the country falls deeper into recession.

Point: With a higher MPS, the multiplier size of Singapore becomes even smaller. Hence, the effectiveness of the government’s counter-cyclical policies, such as expansionary fiscal policies, are further limited in its efforts to raise real national income.

Evaluation 1

However, a higher MPS may be helpful to Singapore’s efforts in getting out of its imported recession, as the higher level of savings causes the supply of loanable funds to rise. This then causes interest rates to fall and investment levels to rise. This in turn causes the AD and real national income to rise.

Evaluation 2The extent of the adverse effects may be limited because the MPC to consume in Singapore is originally small due to the country’s compulsory savings plan known as the CPF employed by the government. Hence consumption takes up only a small percentage of the AD and a fall in consumption does not cause a severe fall in the AD.

Value Judgement

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Michael Lohh

Although the MPS could be a factor that influenced the pace of recovery of the Singapore economy in the e2008 crisis, the pace of the recovery of Singapore was also heavily influenced by the recovery of the economies of its trading partners as it is an export driven economy.

Effects of Recession on Macroeconomic Goals Point: A recession can have various effects on the economy of a country. One of

them is a falling real national income. This means that consumers can afford lower quantities of goods and services, causing their material standard of living to fall.

Point: Unemployment levels rise, along with social problems such as crime and homelessness. This then causes non-material standard of living of the people to fall.

Point: As people lose their sources of income, they are forced to rely on their savings to support their livelihood. This will then cause investment levels and the AD to fall, making the recession worse.

Evaluation

With the falling income, the government’s tax revenue also falls and it loses its ability to support infrastructural construction. This then causes the aggregate supply to fall as the existing infrastructure undergoes wear and tear.

Contractionary Fiscal Policy during Recession

Point: In the case of countries that have accumulated a huge amount of government debt while facing recession at the same time, the utilisation of the contractionary fiscal policy to reduce government debt may be priority for the government. The reduction of government debt may help to restore investor confidence in the economy along with the AD rise and solve the problem of recession. The influx of FDI also improves the economy’s productive level in the long run and hence allows the economy to achieve its non-inflationary, sustainable economic growth.

Point: The reduction of government debt also helps to improve the current account of the economy as the contractionary fiscal policy that has been undertaken to reduce the size of the government debt causes real national income to fall, which in turn causes import expenditure to fall and current account to improve.

Point: The reduction of government debt may also be vital in securing financial or monetary assistance from international organisations such as the IMF or the World Bank. This means that the painful decision to start a contractionary fiscal policy has to be undertaken.

Evaluation 1

A contractionary fiscal policy that is meant to reduce the size of the government’s debt may come into conflict with the government’s macroeconomic objective of achieving sustainable economic growth and low unemployment levels. A contractionary policy can worsen the recession and cause unemployment levels to rise, as C+I+G fall, causing the AD to fall.

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Michael Lohh

Evaluation 2

A fall in the real national income causes the government’s tax revenue originating from personal income tax payments to fall. This means that the government’s debt size does not fall, as a fall in government expenditure is matched by a fall in government revenue as well.

Evaluation 3

In the case of an economy with a small multiplier, a contractionary fiscal policy may not be effective in removing the huge government debt. In contrast, the reduction in government expenditure and increase in tax may cause the saving rate to increase, further reducing the multiplier. Hence a contractionary fiscal policy may have limited effects in resolving government debt.

Value Judgement

The priorities of dealing with debt or a recession actually depend on the type of spending that the government embarks on. If the government is spending on the construction of infrastructure and also the upgrading of workers’ skills through training programmes, a contractionary fiscal policy may not be necessary. Although the government’s debt is not reduced in the short term, the effects of a long-run supply-side policy which brings actual and potential economic growth, ensures that the government revenue rises, improving the fiscal situation of the state.

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