What is inflation? Inflation occurs when there is a persistent and sustained rise in the general price level of goods and services, and is a macroeconomic problem when the rise in general price level is persistent and inordinate. With inflation, a given amount of nominal income buys fewer goods and services than before, which poses socio-political problems in countries that suffer from inflation.
Inflation caused by the demand-side is known as demand-pull inflation while inflation caused by the supply-side is known as cost-push inflation. This paper argues that both demand-pull and cost-push inflation are present in Singapore, but cost-push is far more important to the Singapore economy, especially when it comes to imported inflation in Singapore's case.
[Tutor's Note: Draw and explain the correct AD/AS diagrams. Think also - where do the diagrams fit in, have I labelled them correctly, and what do these economics diagrams show the reader?]
First, it can be argued that AD will rise if there is a decrease in interest rate as when there is a decrease in interest rate, it becomes cheaper and easier for people to consume and invest causing consumption and investment to increase. However, this is not that likely in Singapore's case, given her unique context.
With small domestic market, highly export-oriented
Hence, imported inflation is the most important factor affecting Singapore's economy and is the most likely cause of inflation in Singapore, along with cost push inflation, and with demand pull inflation being the least likely form of inflation in Singapore.