Explain with examples the multiplier effect using the AE-Y diagram (Keynesian cross diagram/ Keynesian 45 degree line diagram). [10]

Introduction to the Keynesian Multiplier Effect

What is the multiplier effect? The multiplier effect can be defined as the total change in income for a given change in injection. The formula for calculating the multiplier, k, is 1/ (1-MPC), where k refers to the multiplier, while MPC refers to the marginal propensity to consume out of national income on domestically produced goods. Alternatively, the multiplier can also be defined as 1/ MPW, where MPW is the marginal propensity to withdraw.

However, because not all of income is spent on domestically produced output, therefore, 1 - MPC =  MPS + MPT + MPM, where MPS, MPT, MPM refer to the marginal propensities to save, tax and import, respectively. Therefore, MPS + MPT + MPM = MPW, the marginal propensity to withdraw. Hence, more importantly, the final multiplier formula discussed in this Economics paper would be k = 1/MPW.

The Keynesian Cross Diagram (AE-Y)

(THINKING QUESTION: How would you draw the AE-Y diagram, and how would it look like? Do please be sure that you can draw and illustrate the various Economics diagrams properly. Perhaps you can try crafting the diagram under timed or simulated examination conditions.) 

In the AE function graph, Aggregate Expenditure is drawn against nominal National Income. 

Aggregate Expenditure refers to the total planned expenditure on domestic output for a given level of national income, whereas nominal national income (Y) refers to the total nominal income or total nominal value of output generated by the economy.

In the AE-Y graph, as the national income rises, the AE also rises. This is due to an increase in national income which leads to similarly an increase in personal income, therefore household consumption increases with a greater amount of money to spend. When consumption increases, induced expenditure also increases, where induced expenditure means that spending is income-dependent. 

It should be noted that the gradient of the graph is determined by the MPC. A higher MPC means that the graph would be steeper. However, households do not spend all their income on consumption on domestically produced goods. They also have to pay income tax, reducing their disposable income. Within their disposable income, a portion is saved and another is spent on imported goods. Therefore MPC < 1 where MPC = 1 - MPW. This explains why the AE curve is less steep than the Y=AE line.

(A numerical illustration could shed some light on the question.) The multiplier effect can be calculated using such a method. Suppose that the government spends $100 and assuming that the MPC = 0.8, induced consumption would rise by $80 (0.8x100). This would boost AE and cause consumption to rise again by $80, where (0.8x80)=$64 would be spent on consumption. After repeated rounds, the total income would increase by $500 (80+64+..). Therefore the multiplier effect is calculated by 500/100 (the original injection)= 5.

Insert AE-Y Diagram/Model with Corresponding Economics Explanation - Think: How Would It Look Like?

The size of the multiplier effect affects the usefulness of expansionary fiscal policy. Expansionary fiscal policy refers to the increase in government spending and/or a reduction in direct taxes, to achieve demand management at the macroeconomic level. With a large multiplier, the impact of expansionary fiscal policy would be greater. This is because a large multiplier would mean that nominal national income increases by a greater factor relative to the size of the injection. 

Comment on Singapore's Economy - Her Small Multiplier, k

However, it has to be said that in the case of Singapore, Singapore has a small multiplier due to our MPW being high. After all, Singapore is import dependent due to her lack of natural resources and has relatively high savings due to compulsory savings schemes such as CPF (Central Provident Fund), and thus has relatively high MPM and MPS, thus resulting in a high MPW. Therefore, the multiplier effect on Singapore would be limited to a very large extent. 

JC Economics Essays: (H2, H3 A Levels) Economics Tutor's Comments - This is a very short, sharp, and accurate Economics paper that addresses the requirements of the question posed directly. The Economics topic here is on the multiplier effect and the AE-Y diagram/ model. This is the basis of Keynesian economics. Students can learn a lot from this essay style of direct writing. However, the usual tutor's question applies: how can I make this Economics essay better? What can I learn from it, and what would I have written that the author missed? Or what has the author written here that I have not addressed? Special thanks to A. C. who contributed this Economics article (write up). Thank you for reading, and cheers. 

Consider Singapore retailers and discuss if oligopoly or monopolistic competition best explains these retailers’ market behaviour. (rephrased adapted question)

- Adapted from an actual A level Economics examination question

Introduction

Does oligopoly or monopolistic competition better explain the market behaviour of Singapore retail firms? First, a few definitions are in order.

What are retailers? First, retailers are firms that do not produce their goods that are sold, but only sell goods which are actually manufactured by manufacturers or producers.

What is an oligopoly? Second, oligopoly is a market structure characterised by many buyers but few sellers, each of the sellers interacting strategically against their rivals, which are the other firms competing in the oligopolistic industry, and there are high barriers to entry, usually caused by high economies of scale. Economies of scale refer to the situation where LRAC (Long Run Average Costs) fall as scale increases, when output increases.

What is monopolistic competition? Third, monopolistic competition is a market structure where there are many buyers and sellers, few barriers to entry, and slightly differentiated products that are quite different from other competitors, but psychologically or physically different. For example, NTUC and Giant hypermarket are examples of oligopoly, because of their market share and situation of rivalry and strategic behaviour, while clothing retail shops such as Charles and Keith are examples of monopolistic competition, because of their many buyers and sellers and slightly differentiated products of fashionable accessories and clothing items.

Pricing and Output, Strategic Behaviour?

Also, price stability, furthermore, could be due to collusion, which means that oligopolies tend to gang up or collude against the public interest by raising prices together, whether through explicit or implicit means.

On the other hand, there is no price stability in monopolistic competition because according to the economic model of monopolistic competition they operate using the profit maximising rule only to make their pricing decisions, where marginal cost equals to marginal revenue (MC=MR), which differs from firm to firm due to their changing marginal costs and marginal revenues.

Non-price Competition - Oligopoly and Monopolistic Competition?

Secondly, oligopolies tend to prefer non-price competition like advertising, freebies and lucky draws, whereas monopolistic competitive firms are more likely to compete based on prices (and output). Due to their large scale, with massive internal EOS, running down along their LRAC, oligopolies are able to use huge, large scale, media-based, newspapers and multimedia advertising, where for example supermarkets like Giant or NTUC often advertise in newspapers. On special occasions, they also have products sold at lower prices or at special discounted, special occasion based prices. These oligopolies also have loyalty programmes, freebies, and even sometimes lucky draws with attractive prizes that make people want to go there, which demonstrates that non-price competition and advertising are important for oligopolies. Non-price competition is of course competitive behaviour unrelated to pricing or output decisions, and is distinct from competing based on MC = MR, the profit maximising rule.

First, monopolistic competitive firms can make independent decisions on pricing and output, whereas oligopolies are mutually interdependent because they are rivals rather than competitors. There is price stickiness in oligopoly, shown by the oligopoly kinked demand curve model, which shows there is no incentive for firms to raise or lower prices as long as their rivals do not do so. This is because raising price leads to losses in revenue along the inelastic part of the demand curve, and lowering price leads to a price war because the other rivals will join in the fray metaphorically.

Also, it should be argued that there is product differentiation for monopolistic competition, because different clothing retail shops have different clothing designs, for instance, Charles and Keith clothing shops specialise in women’s clothing and special types of clothes we love to buy. These monopolistic competitive clothing shops typically engage in price competition which implies that they do and will lower their prices all round if they are able to bring their marginal costs down, for instance by having better and cheaper supply chain management. It finally can be strongly argued that monopolistic competitive firms are more open to price competition in contrast to oligopolies. While monopolistic competitive firms also advertise, they tend to rely on low cost methods such as handing out flyers or using free newspapers rather than broadsheet newspapers and these advertising methods are certainly not their main strategy unlike oligopolies.

JC Economics Essays: Economics Tutor's Comments - This Economics essay is quite interesting and reasonably answers the question set, and certainly could be done reasonably well by many students during the examination timing and under stressful conditions. The student clearly knows his Economics materials, and his Economics tutors have certainly done a lot of good work, and he can also be proud of the Economics content that he has learnt!

However, it does not have a conclusion and seems quite rambling at certain points. It also seems rather dis-organised. In fact, this economics essay could actually have fared so much better if it did have an evaluative conclusion that made a justification on an evaluation made. Also, the essay is a bit short, and lacks well-labelled Economics diagrams (this one is a unique essay because normally I don't include the diagrams drawn in the essays presented, but this one does not actually have any essays drawn, although the student SHOULD, dare I say MUST, have at least one diagram, and in this case two diagrams. Think: what diagrams? See the text.) The student could also have told us what he was going to tell us before telling us what he was going to tell us.

Yet, there are of course good points that we can learn from it. Question is: what are the other good points that you could learn from this essay, other than the criticisms and the comments written here? Thanks for reading and cheers. 

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

Should governments only aim for a low and stable rate of unemployment? First, what is unemployment? First, this paper defines unemployment. A low and stable rate of unemployment refers to a situation where workers who are willing and able to work are largely able to find employment, in contradistinction to a situation of unemployment. This is indeed one of the macroeconomic objectives of governments. However, governments also have other objectives, such as sustained economic growth, price stability, and a healthy Balance of Payments (BOP). This essay argues whether a low and stable rate of unemployment is the only macroeconomic objective that governments should aim for would depend on the economic conditions and status of the economy.

Increases in AD in a Developing Economy

This paper argues that a low and stable rate of unemployment could be the primary aim if the economy is a developing economy, as it would achieve other macroeconomic objectives relevant to developing economies. By assumption, a developing economy can be characterised by having spare capacity and massive unemployment. A developing economy is characterised this way as there is more spare capacity in such economies because they have huge populations. A low and stable rate of unemployment means more employed workers being able to spend more on consumption (C). Firms can take this steady increase in C as an indication for more investment (I). The rise in C, I and (X – M) would lead to a rise of the AD of the economy, and the economy would reach full employment eventually.

Other macroeconomic objectives can be achieved because of a focus on low unemployment. The General Price Level (GPL) can be considered virtually unchanged due to the spare capacity of the developing economy. Inflation is defined as a persistent and sustained increase in the general price level, and while inflation can be dangerous, mild inflation can be seen as useful as it stimulates economic growth and production. Production would increase, leading to more workers being employed. This would trigger an increase in the AD due to the probable increase in the components of C, I, G and (X – M). As a result, the economy is able to achieve sustained economic growth. This leads to governments being able to collect a steady stream of taxes from the economy. The tax revenue collected can potentially be used for basic needs of housing, healthcare, and education, among other things. This helps to increase the standard of living for the economy. Hence, all these effects collectively would lead to full employment, with stable inflation, and economic growth, which are all good objectives for the developing economy, but if pursued to its logical end, inflation could result once the developing economy enters developed status or if it hits the full employment level.

Increases in AD in a Developed Economy

However, a low and stable rate of unemployment should not be what governments should only aim for if the economy is a developed economy. A developed economy can be described as having its AD near or at the full employment level (Yf); developed economies are characterised as such as there is less spare capacity there, because, due to their low and stable rate of unemployment, developed economies are usually operating near to full employment (Yf) or even at full employment. The effects of a low and stable rate of unemployment would translate into an increase in the AD. Assuming an unchanged AS, an increase in the AD is undesirable. This is because the increase of AD results in an increase in the GPL. In such economies, such inflation would cause overheating in the economy as the GPL increases while real national output remains the same. An increase of the AD beyond a certain point would result in hyperinflation affecting the objective of price stability. Hyperinflation would cause increases in the prices of products, leading to the loss of the value of money.

Hyperinflation would also affect the aim of having a satisfactory balance of payments (BOP), for instance, a BOP surplus where there are more exports than imports. With higher prices, the export price competitiveness of the economy would fall as domestic goods are now more expensive relative to other economies. There would also be an increase in the amount of imports (M) as foreign goods are now cheaper. This would lead to more imports than exports. Though one can argue that the fall in the net exports (X – M) could be a corrective mechanism to bring AD down, it would not be applicable as developed economies tend to import more than export, generally due to their high incomes and wealth. Hence, if a low and stable rate of unemployment is the only aim of such economies, it would compromise other macroeconomic aims of price stability and having a healthy BOP. Therefore, a low and stable rate of unemployment should not be the only macroeconomic objective that governments of such economies should aim for.

Conclusions

In conclusion, whether a low and stable rate of unemployment should be what governments should only aim for would depend on the conditions of the economy in question, with developing countries possibly focusing more on employment. There are also other macroeconomic objectives that governments should also aim for, such as low inflation, economic growth, and a healthy BOP, and there seem to be trade-offs when focusing solely on one macroeconomic goal. A delicate balancing act should and must be maintained. In the final analysis, governments should aim for a set of macroeconomic aims rather than only having one aim. 

Junior College (JC) Economics Essays: Tutor's Comments - This Economics paper is part (b) of a two part question on unemployment in Singapore. It was written and contributed by TJL, an Economics teacher I knew from PGDE (JC) and National Institute of Education (NIE) times, and who is an excellent, motivated, and hardworking Economics tutor. However, having said that, as part of Socratic questioning and learning for the benefit of students - TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, how would you improve on this essay? Reflect on the essay's structure, and reflect on how you would make this essay better, stronger, tighter, and more evaluative in the conclusion. Think about it. Think about it some more. Do remember to read Economics essays with a critical, probing, and intellectual mind, because you want to think of ways of how you can learn, study, and revise Economics, as well as improve on your essay writing skills and approaches to Economics examinations. Thanks for reading and cheers!

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

Introduction

What is unemployment? Unemployment is the situation when people willing and able to work are unable to find employment, with the most common types being structural unemployment, demand-deficient unemployment, frictional unemployment, and seasonal unemployment. This essay explains the likely types of unemployment in Singapore that could challenge sustainable economic growth. Unemployment in Singapore that could affect sustainable growth is likely to be brought about by the following major factors: changes in the underlying structure of the economy and cyclical factors.

Body of Essay

The first likely form of unemployment in Singapore that could challenge sustainable growth would be structural unemployment. Structural unemployment occurs when there is a mismatch of skills and knowledge. For instance, structural unemployment occurs when workers in sunset industries, with declining demand for their products, are unable to be reemployed in new, growth industries, with increasing demand for those new and probably high-tech products, due to a mismatch of skills, talents, and training for the new changed production structures. Also, for example, in Singapore in the 1980s, there was a shift from low-end production to higher-end production and this shift required workers to have the required higher level skills. As a result of the mismatch of skills required of workers to work in the new high-end production industries, structural unemployment occurred. Singapore often faces structural changes due to the dynamic changing needs of her economy, and the extent of structural unemployment depends on the adaptability of workers to adapt to these new needs.

The second form of unemployment that could challenge Singapore’s sustainable growth would be cyclical unemployment, also known as demand-deficient unemployment. This unemployment is linked to the business cycle, where downturns occur now and then, aggregate demand (AD) falls, causing unemployment, and a fall in actual economic growth. Actual economic growth can be thought of as an increase in real national income in a given period of time. In particular, due to the small size and relative openness of the Singapore economy, dependence on trade makes Singapore vulnerable to cyclical unemployment, economic recessions, and falling AD. This leads to unemployment because there would be a fall in the general price level, profit expectations would also fall, and producers would cut down on employment, resulting in more unemployed workers with fewer job vacancies available.

Falling AD of the Singapore Economy

The sustainable growth of the Singapore economy can be defined as a sustained increase in the real national output or real national income (real Y) over a period of time. Structural and demand-deficient unemployment affect the sustainable growth of the Singapore economy as they affect the sustained increase in Singapore’s national income. During periods of low economic activity and high unemployment, there will be a fall in the consumption (C), investment (I), and net exports (X-M) of an economy, shifting AD to the left. The fall in C is a result of the fall in the disposable income of the workers as a result of being unemployed. The fall in C, I and (X –M) would lead to a fall in the AD. Assuming that the Aggregate Supply (AS) curve is unchanged, the fall in AD would translate into a fall in real Y over the period. This fall in real Y over a period of time would challenge Singapore’s sustained growth.

Conclusions

In conclusion, structural and demand-deficient unemployment are the two main forms of unemployment which potentially challenge the sustainable growth of the Singapore economy, lowering the national income of the economy. There are also other forms of unemployment such as frictional unemployment or seasonal unemployment that would also occur in Singapore. However, such forms of unemployment would not affect the sustainable growth of the Singapore economy; as such both structural and demand-deficient unemployment are by far the biggest enemies to growth.

JC Economics Essays: Tutor's Comments - Special thanks to TJL for his kind contribution. TJL is a friend (fellow teacher) of mine I knew from National Institute of Education (NIE) days, and who later went on to become an excellent, outstanding Economics tutor at IJ after completing his PGDE. This Economics essay was written under examination conditions. In the earlier, past few posts, here on JC Economics Essays, I have given detailed comments about what was right, good, and great about the essays and gave my view, comments, and ideas. It's time for me to revert back to the older Socratic questioning style of earlier posts here on my site! TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, and ignoring the provenance of this sample/ model /version of the answer given by a tutor - what grade would you give this Economics paper, and why? what are the good things that you can learn from this Economics paper, and what are bad things that you should not learn from this paper? also, how would you improve on this Economics paper? how else could you approach it? Do remember to ask questions, and read with a critical, yet open, constructive mind. Thanks for reading and cheers!

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Introduction

This paper discusses if fiscal policy is the most effective way for Singapore to sustain a successful economy, where the idea of a “successful economy” is based on attaining the macroeconomic goals of generally low unemployment, low inflation, and economic growth. The means of attaining each of these desirable macroeconomic objectives may sometimes be at odds with other macroeconomic goals because of trade-offs. The most effective way for Singapore to sustain a successful economy is not to depend on one single macroeconomic policy; in particular, due to Singapore’s small and open economy, fiscal policy would go only a little way to help Singapore attain her macroeconomic goals, and a combination of exchange rate policy and supply-side policies would work more effectively instead.

Fiscal Policy Can Be Effective

First and foremost, it can be argued that fiscal policy could theoretically achieve the macroeconomic goals of low unemployment, low inflation, and economic growth. First, low unemployment can be achieved through the use of expansionary fiscal policy. What does expansionary fiscal policy mean? It  means increasing government spending (G) or lowering taxes (T), in times of high unemployment or recession. The discretionary expenditure by the government, for instance on the military or on education, would raise aggregate demand (AD) and drive up employment, due to the multiplier effect, thus resulting in a higher level of employment. AD shifts to the right and causes unemployment to fall. What is unemployment? Unemployment is defined as the situation in which people who are willing and able to work are unable to find employment. Secondly, likewise, stable actual economic growth can attained the same way, because expansionary fiscal policy can ensure that growth is maintained during recessions. Actual growth can be thought of as an increase in real national output. These implications are reflected in the diagram below.

Likewise, fiscal policy can be used to reduce inflation by contracting AD in times of high inflation in order to reduce inflationary pressures and control prices. This is the reverse of expansionary fiscal policy; contractionary fiscal policy can reduce AD in times of inflation. Inflation is defined as a persistent and inordinate increase in the general price level, and if it is demand-pull, contractionary fiscal policy reduces AD accordingly.

Limitations of Fiscal Policy

On the other hand, the way fiscal policy works in reality is different from theory because policymakers may not know exactly where the full employment level is in reality, and time lags, recognition lags, and implementation lags are all real. All the theoretical effects of fiscal policy also assume that the economy has a sufficiently large multiplier for the injections by the government to make large impacts on national income and employment. It also presupposes that the government’s budget does not suffer from massive deficits, and that fiscal policy would not result in the “crowding out effect”, when the government drives up interest rates, negatively affecting the private sector, when it attempts to finance policies through borrowing.

However, more importantly, while the Singapore government’s finances is such that it can potentially deliver a fiscal stimulus without financial or political problems, the fact that Singapore’s national multiplier is small implies that this would not have a great impact on growth or employment. The high level of imports and high proportion of savings in Singapore means that the multiplier effect would be small. Furthermore, fiscal policy seems most effective in reducing cyclical unemployment, associated with falling AD during a recession, and does not go a long way in relieving structural or frictional unemployment; as for inflation fiscal policy helps reduce demand-pull inflation and does not go a long way in alleviating cost-push inflation. Even if fiscal policy could generate employment, it is only in the short run, and unemployment will eventually return if it was actually due to structural unemployment, the mismatch of skills and knowledge in an economy due to structural changes in the methods of production, and hence such reductions in unemployment and the concomitant growth would not be sustainable.

Exchange Rate Policy

In order to sustain a successful economy, arguably a combination of fiscal, monetary and supply-side policies is required instead. In particular, monetary policy – in Singapore’s context, an exchange rate policy – would be able to affect AD during short-term economic fluctuations. It should be noted that interest rates-based monetary policy cannot be applied in Singapore as a result of Singapore’s vulnerability to short-term capital flows and thus an exchange rate policy has to be adopted in Singapore. As Singapore is dependent on imports, low inflation can be sustained instead through a gradual appreciation of the currency, because the imports would look relatively cheap vis-à-vis other countries. However, it should be noted also that this would affect exports negatively, on the flip-side.

On the other hand, depreciation can be used to increase AD, by raising demand for Singapore’s exports, since short-term depreciations of the Singapore dollar could help to raise competitiveness of Singapore’s exports and thus drive growth and generate employment. However, it should again be noted that this would affect inflation, on the flip-side. Hence, trade-offs are inevitable, although exchange rate policy is clearly a viable alternative.

Supply-Side Policies

As for long-term economic growth and stability, supply-side policies are necessary to sustain potential growth. Education and retraining of workers has to be implemented in order to maintain flexibility of labour and allow Singapore to cope with structural changes.

Furthermore, in terms of reducing unemployment, job fairs and placement or matching agencies could also help reduce frictional unemployment. Low domestic inflation can be maintained in the long run through continuous improvements in productivity and the enhancement of cost-competitiveness. The productive capacity of the economy must grow continuously in order for increases in AD to translate into sustained, non-inflationary, real economic growth in Singapore's national output; this increase in LRAS can be encouraged through fiscal spending that has supply-side effects such as investments in infrastructure and education, which would both affect AD and LRAS, leading to economic growth both actual and potential.

Conclusions

In conclusion, the application of fiscal policy is not an effective way for Singapore to sustain a successful economy that achieves its macroeconomic aims, thanks primarily to the small and open nature of the Singapore economy that gives rise to a small multiplier resulting from the high level of leakages due to high savings from CPF and high import contents in inputs. This reduces the impact that fiscal policy can have on the economy because the famous Keynesian multiplier effect is mitigated. The current managed float exchange rate policy that Singapore adopts is more significant in achieving short-term demand-management objectives. In the long-run, the government would sustain a successful economy through a combination of both demand-management and supply-side policies that enhance the long-term productivity and productive capacity of the economy, thus providing potential growth, whilst driving AD through actual growth, which reduces unemployment and spearheads economic development. Hence, fiscal policy is clearly not the most effective way – an economic policy package is better. 

JC Economics Essays: Tutor's Comments - This Economics paper is very well written, full of Economics perspectives, theories, concepts, and arguments. It also has good content on the Singapore economy. It covers the relevant Economics materials required and has an excellent thesis- anti-thesis - synthesis approach, that uses relevant examples that are contextual, real life, and related to the question. The conclusion presented and argued is clear, relevant, and evaluative in nature - do remember the important keyword here is "evaluative". The usual Economics tutor's caveat applies, of course, that naturally to get the highest grades, students must always remember to add Economics diagrams that are well-labelled, properly and carefully explained, and relevant to the context and question. This Economics essay under examination conditions can definitely get the highest marks in an examination. As a friendly, useful tip, do think through this particular Economics paper and reflect on these educational comments presented. Thanks for reading and cheers!

Discuss, with relevant examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Discuss, with relevant contextual examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Introduction - market structure, oligopolies and monopolistic competitive firms

Firms’ behaviours can be explained by the market structures they exist in, where the conditions and situations are the number of buyers and sellers in the market, the type of goods they produce be they homogeneous or differentiated, the barriers to entry that make it easy or difficult for individual firms to enter or exit the industry, and the strategic interactions between different rival firms. These conditions and situations would determine the behaviour of various types of firms in different industries in Singapore. 

In Singapore, it can be argued that the huge, large firms that dominate the economy are largely big manufacturing and service industries, and global Multi-National Corporations/ Multi National Companies (MNCs) that export products overseas. The small size of Singapore’s markets allows just a few firms to dominate and hence it would seem that prima facie oligopoly is the most appropriate structure that can explain the behaviour of firms in Singapore. 

This Economics paper therefore argues that many firms in Singapore are large companies, often exhibiting high barriers to entry and often large economies of scale, and are strategically interdependent on their rivals’ actions, and thus the oligopoly market structure is arguably the most appropriate model for explaining their behaviour. 

However, on the other hand, it can also be argued that monopolistic competition can also describe and explain the behaviour of smaller firms in Singapore, given that there are many smaller firms in Singapore.

Oligopoly can be applied to Singapore’s context

First, there are significant barriers to entry for most large firms in Singapore, which are possibly driven by economies of scale (EOS). As the pure forms of market structures, such as perfect competition and monopoly, do not adequately explain the behaviour of firms in real life, let alone Singapore firms, it has to be argued instead that oligopoly’s features go a long way to describe the behaviour of firms. For example, in the telecommunications industry, starting up requires a lot of capital, and thus this creates a major barrier to entry for most entrants because of the huge fixed, and often sunk, costs required, and thus it is no surprise that Singtel, M1, and Starhub are oligopolistic in nature. 

[Economics tutor's note: For advanced A level students or H3 students or undergraduate students who want to learn more Economics, see Oliver Williamson for more Economics materials on asset specificity. On a related note, for transaction costs: Ronald Coase might be interesting to read about too, on this topic.] 

Other barriers to entry may not be based on EOS, which is a natural kind of barrier; other barriers may be man-made artificial barriers such as laws and regulations, such as those regulating SMRT and SBS – hence, the high barriers to entry that are characteristic of oligopolies are present in many large Singapore firms.

Secondly, oligopolistic markets are also characterised by non-price competition, using aggressive branding to differentiate their goods, with firms being mutually interdependent, which results in their need to monitor their rivals’ actions and devise counter-responses. Strategic interaction, which means responding to rivals’ actions by devising counter-responses, is a particular characteristic of oligopoly not found in other market structures. 

There are many good examples to illustrate this feature. Take the example of the market for Singapore breakfast toast and coffee; the market in Singapore has major firms selling toast, coffee, and tea, alongside a variety of Singaporean foods. These products are differentiated because the meals are tweaked to match unique styles and there are a few other cafes selling similar yet differentiated goods. The market is largely a mix of firms competing with barriers to entry in terms of the cost of branding. There is price leadership in this particular market, with prices of drinks set similarly, and with smaller cafes usually taking their cues for pricing from the bigger chain cafes mentioned.

In major markets such as banking, supermarkets, and telecommunications, non-price competition is easy to spot from differentiated services offered; often a new service or promotion becomes widespread after it is first started by a dominant player in the market, demonstrating once again that the firms are strategically interdependent. Oligopolies have strategic, game-theoretic interactions because they face rivals and not competitors. Because of Singapore’s small market size, most of these markets are dominated by just a few major players, and as such they have to take into account their rivals’ actions. 

In banking, for example, there are the giant firms DBS and UOB, while the Singapore telecommunications industry also features a few giants, Singtel, Starhub, and M1. Whenever DBS comes up with a new form of priviledged banking, UOB must come up with some similar programme too. Singtel, Starhub, and M1 often have advertising campaigns and fund major events such as Formula One (F1), and offer exciting promotions to attract customers to their cable channels.

Monopolistic competition can be applied to Singapore’s context

On the other hand, monopolistic competition can also explain many of the other types of firms in the Singapore economy. Many small firms in Singapore operate in a monopolistic competitive market, characterised by many buyers and sellers, rather differentiated products, and generally low barriers to entry. For instance, hawker fare in hawker centers, restaurants offering Chinese food, and neighbourhood convenience stores (the famous "mama shops") are good examples; namely the point is that firms that are small, with limited market power, and which provide slightly differentiated goods and services are monopolistic competitive. Each has limited pricing power because there are many of them sharing the same market, and barriers to entry are low, thus ensuring these firms earn normal economic profit in the long run, because the presence of supernormal profit would entice others into the market and compete away the profits due to the low barriers to entry. Hence, the monopolistic competition model thus goes a long way in explaining the many different small shops in Singapore’s economy.

Conclusions

While there are many market structures, such as perfect competition, monopolistic competition, oligopoly, and monopoly, primarily monopolistic competition and oligopoly are relevant, given Singapore’s context. Perfect competition and monopoly in their pure forms often cannot be seen in the real world due to their ideal nature. In conclusion, the oligopoly model is one of the most appropriate models that could explain the behaviour of large firms in Singapore, as huge firms dominate major sectors in Singapore's small and open economy. Yet, clearly the smaller firms in Singapore can be explained using the monopolistic competitive market structure. Perhaps it takes more than one market structure to adequately characterise firms’ behaviour in any economy, and not just Singapore’s. However, given that Singapore is a small economy, and most major firms located in Singapore are large, so as to reap massive EOS, even with the presence of many firms engaged in monopolistic competition, oligopoly still seems to be the model most appropriate in describing the behaviours of firms in Singapore. 

JC Economics Essays: Tutor's Comments - This Economics essay on market structure, about oligopoly and monopolistic competition, is rather well argued, interesting, and relevant. The Economics materials presented are based on real life examples from the relevant context, and the English language is fluent and clear. The student presents material that is clear, easy to read, and in a logical, coherent fashion that would impress tutors. The conclusion is evaluative and a judgement is properly made. Overall, it is definitely possible to succeed in writing good Economics essays if students learn how to write such essays under examination conditions, and exhibit these good attributes. However, of course it has to be said that the proper Economics diagrams and the relevant explanations of both oligopolies and monopolistic competitive firms are required for the best grades. Also, at some junctures, this Economics essay seems a bit repetitive, redundant, tautological, and perhaps even convoluted, but overall this issue seems more of a language or writing issue rather than problems with Economics knowledge and content. Do reflect on it and think through the comments; thanks for reading!

China's Economy: Discuss the implications of a revaluation of the Chinese yuan on Singapore’s economy. [25]

In recent years, economists worldwide argued that China should revalue her yuan, or shift away from her dollar peg, because her yuan (RMB) has been viewed as undervalued. (Year 2010-2012).

Discuss the implications of a revaluation of the Chinese yuan (RMB) on Singapore’s economy. [25]

Introduction

The Chinese yuan (reminbi, RMB) has long faced revaluation pressures with China’s mounting trade surpluses and developed countries’ claims of China dumping cheap goods on their markets, flooding their economies with low-priced goods “Made in China”. 

This paper argues that, as an increasingly dominant trading partner for Singapore, if China were to revalue the yuan, it would have a huge impact on Singapore’s economy. Revaluation, an increase in the value of the Chinese yuan, will impact the Singapore economy through imports from China, exports to China, and the concomitant effects on the balance of payments, and may thus impact Singapore’s economic growth and national income.

Imports: Imported Inflation

First and foremost, Singapore imports a large variety of goods from China, as Singapore relies on many Chinese intermediate goods as inputs for production of exports for her export sectors. As these are inputs or necessities needed in Singapore, the demand for these goods is relatively price inelastic, and thus the revaluation of the yuan, which makes Singapore’s imports from China more expensive, would likely raise Singapore’s import expenditure. 

Most importantly, because Singapore relies on Chinese inputs for production of both exports and also domestically consumed goods, a revaluation of the yuan would result in imported inflation in Singapore, as the prices of domestic goods will rise to account for the rising costs of production due to the increased costs of raw materials in terms of Singapore Dollars. 

Inflation is defined as a persistent and sustained increase in the general price level, and can be divided into demand-pull and cost-push inflation. In this case, cost-push inflation in terms of imported inflation would result from a revaluation of the yuan.

Exports: Earning?

However, on the other hand, Singapore’s exports to China would increase due to a revaluation of the yuan, ceteris paribus. A revaluation of the yuan, without any corresponding rise in the value of the Singapore dollar to offset the relative effect, would result in Singapore’s exports to China appearing cheaper in yuan. With the growing middle class in China and their rising disposable income, consumption of imports is rising in China, and Singapore can benefit from this boom. 

Yet, it has to be argued that the problem is that Singapore depends heavily on imported inputs, being a small and open economy, and as such it is likely that the increased exports to China would be less than the increased costs of imports, which are often needed to produce output in Singapore. This results in a catch-22, because the inflation from the imported inputs, which makes Singapore’s exports more expensive, would counter the relative price effects of the revalued yuan.    

Balance of Payments: Trade Deficit?

Therefore, the revaluation of the yuan would worsen Singapore’s balance of payments, possibly causing a growing trade deficit with China, thus hampering the Singapore government’s goal of a healthy balance of payments surplus. 

The balance of payments refers to the accounting record of all monetary transactions between a country and the rest of the world, and can be classified into the different components of the current account, capital account, financial account, and (statistical) balancing item. There could be a trade deficit for Singapore if (X-M) falls.

Damage to Singapore’s National Income and Growth

Furthermore, as China is one of Singapore’s emerging exporting market and increasingly important trade partner, given Singapore’s economy as one being driven by trade, the revaluation of the yuan can affect Singapore’s national income adversely. Economic growth can be thought of as increases in the Gross Domestic Product (GDP) of a country, and can be classified into potential and actual growth. 

First, potential growth could be hampered due to the rising input costs from goods we buy from China from Singapore’s perspective. Although potentially Singapore’s actual growth might improve if AD goes up due to rising X, this could be offset by long term damage to our potential growth. 

Furthermore, if Singapore’s exports are affected because unit costs have risen due to imported inflation because Singapore uses foreign inputs to produce exports, as argued earlier, then X might fall in the long run, and also cause actual growth to slow down. Hence, potentially a rise in the yuan could potentially and possibly lead to both lack of potential and actual growth for Singapore’s economy. Thus, while export revenue might increase in the short term, as Singapore is small and open, the higher costs of imported inputs from China would have detrimental effects and as such, the revaluation of the yuan has largely negative implications on Singapore’s BOP.

Policies and Conclusions

Since the export sector of (X-M) takes up a huge proportion of Singapore’s national income because Singapore is a open and small economy, falling net export revenue from China can potentially reduce Singapore’s rate of growth by shifting her AD to the left, unless this is cushioned by rising export revenues with other trading partners, like the USA and the European Union. 

However, that seems unlikely in the intermediate term given the global financial crisis and recent Eurozone crises and the concomitant recessions worldwide. Fortunately, as long as the Monetary Authority of Singapore allows an appreciation of SGD, ahead of the revalued yuan, the adverse impact of the revaluation on Singapore’s economy would likely be minimal. Singapore pursues an exchange rate policy using a managed float exchange rate system in place of a “standard monetary policy”. A strong Singapore Dollar keeps imported inflation low by maintaining the low cost of her imports. 

In conclusion, the implications of a revaluation of the yuan on the Singapore economy are most likely negative overall, but Singapore has the appropriate policy tools in exchange rates and monetary policy to manage and mitigate these impacts and will use them if need be. Hence, to a large extent, the discretionary powers of the MAS would be useful in mitigating the effects of a revaluation in the yuan. 

Junior College Economics Essay: Tutor's Comments - This Economics paper was written and contributed by a Chinese student from China. This Economics essay has to be praised: first of all, it was composed and written under H2 JC Economics examination conditions; second of all, the language is good, refined, and proper; third, the content knowledge is there, and there is wide understanding of both the Singapore and the Chinese economies. There is good application of economics knowledge and concepts, and there are also empirical evidence and current affairs discussions. As an Economics tutor, this is one of the best Economics exam pieces that I have seen by a Chinese student, and it goes to show that when students work hard, study hard, and try their best, they can achieve, grow, learn, and develop rapidly. If they want to, they can put their heart into learning and studying Economics. As usual, do think of how you can improve upon this work and how you would approach this essay. Maybe, try to write out the answer without referring to this sterling Economics essay? It has also to be admitted that this Economics paper is (of course) not perfect: What other economics concepts, theories, and knowledge could you bring in to make the discussion richer? Thanks for reading and cheers. 

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

Discuss the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. [25]

This paper discusses the extent to which globalisation has helped Singapore achieve its macroeconomic objectives. Globalisation refers to the integration of economies through greater flows of trade, capital, labour, and technology across international borders. Singapore’s four main macroeconomic objectives are high and stable economic growth, a low inflation rate, low unemployment, and a favourable balance of payments (BOP). To a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation brings with it downsides which have to be properly mitigated.

Economic Growth

First, globalisation has helped Singapore attain actual economic growth through increased international trade. Actual growth means an actual increase in real Gross Domestic Product (GDP), a shift in Aggregate Demand (AD) to the right. An increase in net exports (X-M) to the rest of the world raises AD, which in turn leads to a more than proportionate increase in GDP via the multiplier effect. Singapore has relied heavily on exports for economic growth. In fact, net exports make up the largest component of Singapore’s GDP. Increasing actual growth also helps Singapore achieve full employment, or alternatively low unemployment.

Second, large amounts of foreign direct investment (FDI) have helped Singapore achieve potential economic growth. Potential growth is the increase in the economy’s potential capability to produce output. Transfers of physical capital, human capital, and technology from Multi-National Corporations (MNCs) have helped increase the Singapore economy’s productive capacity, and thus shifts Singapore’s long-run Aggregate Supply (LRAS) curve to the right, increasing her potential economic growth.

Third, Singapore has also benefited from increased labour flows across international borders. Importing foreign labour leads to an increase in Singapore’s labour which raises the economy’s productive capacity. This is a relatively efficient and cost-effective way of increasing potential growth.

Low Inflation

Fourth, globalisation has helped Singapore keep inflation low. Inflation is defined as a persistent and sustained increase in the general price level, and it is generally seen as a problem. By importing raw materials from other countries at low prices, Singapore has been able to lower her costs of production which translates to lower prices for final products. Importing necessities and other finished products helps keep the general price level down. Also, globalisation increases the Singapore economy’s productive capacity which lowers prices. This is reflected by a rightward shift of the Long Run Aggregate Supply (LRAS) curve, which increases Singapore’s productive capacity in the long run, and concomitantly lowers prices and prevents cost-push inflation.

Low Unemployment

Fifth, globalisation helps to keep Singapore’s unemployment low. Increased export levels shifts AD to the right which in turn leads to higher equilibrium national output. This means that actual growth occurs, which shifts AD towards the full employment level, which lowers unemployment.

BOP

Finally, Singapore is able to have a positive net-export position by importing cheaper raw materials from abroad and exporting high value-added products. For example, Singapore imports crude oil from abroad, refines the oil, and then exports it to different countries. Because the value of Singapore’s exports exceeds the value of her imports, she has a current account surplus, which could translate into a BOP surplus, assuming the deficit in the financial or current accounts are not huge.

Downsides of Globalisation

Yet, despite all its apparent benefits, globalisation has some downsides which could possibly derail Singapore’s macroeconomic aims.

First, Singapore’s dependence on exports makes her vulnerable to negative economic conditions in other countries. If one of Singapore’s trading partners were to experience a recession, demand for her exports would fall. This reduces AD which leads to lower equilibrium national output. Thus, the Singapore economy is susceptible to demand shocks. For example, Singapore’s GDP decreased during the financial crisis of 2007/2008. Thus, while globalisation might confer growth, it also means that same growth could potentially be more volatile.

Second, while globalisation gives Singapore a bigger market for her exports, it also means that she could face more competition. Developing countries, like China, are catching up quickly. Singapore has already lost her comparative advantage in low- to medium-end manufacturing to rapidly industrialising countries. If exports decrease due to competition from low-cost countries, it will result in a fall in AD, which would lead to a drop in output. Over the years, Singapore has had to move up to higher value-added goods and services like biomedical or financial services in order to remain competitive.

Third, increases in Singapore’s productive capacity brought about by globalisation might not be permanent because she is highly reliant on MNCs which are by nature internationally mobile. They could shift operations to a lower-cost location, taking capital with them. There is also no guarantee that Singapore’s “foreign talent” will stay in the country for the long term. Furthermore, importing foreigners to increase Singapore’s labour is also unsustainable in the long term given Singapore’s small land size because the influx of foreigners, perceived to be competing with Singaporeans for jobs and space, has become a major source of political and social discontentment and political acceptability is a major issue. Thus, potential growth might be illusory and fraught with many potential political perils.

Fourth, if the Singapore economy is already operating at or near full employment, then a rise in AD due to increased exports could possibly and realistically lead to demand-pull inflation. Singapore’s persistently low unemployment rate suggests that her economy is operating at close to full employment already. Thus, inflation could be a potential problem.

Fifth, importing raw materials from abroad also leaves Singapore vulnerable to cost-push inflation, more specially imported inflation. For example, Singapore was affected by the rise in oil prices due to political uprisings in the Middle East. Hence, Singapore is vulnerable to supply shocks.   

Sixth, should Singapore lose export competitiveness, (X-M) will become negative which would mean a current account deficit and a likely BOP deficit. Weak demand for exports would result in a depreciation of the Singapore dollar which would increase the price of imports. A depreciation of the Singapore dollar is likely to be inflationary given Singapore’s dependence on imported raw materials, and because it becomes more expensive to buy imported inputs which Singapore needs to produce goods. A deficit in the BOP also means a decline in the country’s foreign reserves which means that if Singapore has few foreign reserves, her currency will be vulnerable to speculative attacks.

Seventh, globalisation could also potentially be harmful for employment. Singapore’s heavy reliance on exports means that she will experience high cyclical unemployment should her major trading partners enter recessions. Perhaps, even more worrying is the increase in structural unemployment because lower-skilled workers could find their jobs being outsourced. Even if their work cannot be easily shifted abroad, they face competition from foreign workers willing to work longer hours and at lower wages. Concomitantly, there is a shortage of workers able to take on high-skilled jobs created by the global economy. As such, Singapore has had to import “foreign talent” to fill this gap. Therefore there are many negative implications for the labour market.

Conclusions

In the final analysis, despite many drawbacks, globalisation has been largely beneficial for Singapore. This is mainly due to the way in which the government has managed to tap into opportunities offered by a globalised world. For example, by providing necessary infrastructure, low tax rates, and a highly-skilled workforce, the government created conditions conducive for international trade and economic growth. At the same time, the government has been able to mitigate some of globalisation’s downsides through her economic policies. Singapore could and does use exchange rate policy. The Monetary Authority of Singapore (MAS) has the discretion to allow the Singapore dollar to appreciate in order to mitigate the inflationary effect of rising prices. Hence, to a large extent, globalisation has helped Singapore achieve its macroeconomic objectives; however, globalisation also brings with it several downsides which have to be properly managed.

JC Economics Essays: Tutor's Comments - This paper was modified and amended from one of the Economics essays written by my friend and classmate from NIE (National Institute of Education). After NIE, he became an Economics tutor at Raffles Institution (the JC section). [Special thanks and acknowledgements to my classmate's contribution.] This Economics essay is about globalisation and the impacts on Singapore's macroeconomic goals and aims; it also discussed policy options and methods to tackle impacts. There are many other globalisation and Singapore economy Economics questions and answers on my site here; do take your time here to explore and read, review, and study the other questions and answers. Compare and contrast them; think through them as well. Alright, here it is time to do the usual tutor's exercise once again: imagining that you are an Economics tutor, examining and marking this paper, what would you look out for? What would you consider a valid, reasonable, nuanced, and balanced argument or point? As an Economics tutor, how would you grade this paper, and why? Thinking through these processes will help you in writing better and better Economics essays, and improve your understanding and knowledge of this interesting and exciting subject. Thanks for reading and cheers!

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion? [17]

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion?

Inflation brings about some adverse effects to the economy and hence it is important for governments to implement policies to curb inflation. The policies used would differ according to the type of inflation as well as the nature of the economy. This paper discusses if fiscal policy works best to achieve price stability in a small and open economy, and uses Singapore as a case study in particular. First, it should be noted that Singapore is a small and open economy with no natural resources, relying heavily on trade, international capital flows, and foreign direct investments to drive growth. This paper argues that fiscal policy can be used, but its impacts are massively limited given Singapore’s context.

What is fiscal policy?

Fiscal policy refers to the manipulation of government expenditure and taxation to achieve macroeconomic goals. A contractionary fiscal policy could be used to curb inflation. Government expenditure could be reduced or taxation could be increased. With a lower government expenditure, this would translate to a lower aggregate demand (AD) which consists of AD = Consumption + Government expenditure + Investment + Net Exports, or AD = C + I + G + (X-M).

Through the multiplier process, a fall in G would lead to a multiple fall in AD. With a fall in AD, firms would accumulate inventories and this would be a signal to reduce production and output. Firms will reduce their number of workers hence resulting in a fall in output and a rise in unemployment and a fall in national income. With a fall in household incomes, there is a fall in spending and hence through the multiplier process, this would result in a contractionary effect on the economy. Hence, AD would shift to the left as shown, resulting in a fall in the general price level.

With higher taxes such as income taxes, this would reduce the disposable incomes of consumers and hence this would also reduce consumption expenditure, shifting the AD curve to the left, and, hence, also resulting in a fall in the general price level.

Limitations of Fiscal Policy in Singapore’s Context

However, the effectiveness of fiscal policy would depend on the size of the multiplier. In the case of Singapore, the size of the multiplier is small due to the high marginal propensities to save and import. This is firstly due to compulsory savings such as the Central Provident Fund (CPF), and, secondly, a high marginal propensity to import, among other factors. Because Singapore is a small and open economy that relies heavily on foreign trade, there would be high leakages from the economy. Also, it would also be difficult to reduce government expenditure for long-term, major projects. Increasing personal income tax could also result in a disincentive to work and a higher corporate tax could drive businesses away from Singapore.

Other Possible Solutions

On the other hand, the Singapore government can also use contractionary monetary policies (in Singapore’s case, an exchange rate policy), or supply-side policies instead to tackle inflation, rather than just fiscal policy.

Monetary Policy, in Singapore’s Context

Monetary policy refers to the use of interest rates to achieve macroeconomic objectives. In Singapore’s case, her monetary policy is tied to exchange rates, and Singapore uses a form of exchange rate policy because Singapore is dependent on external demand. Therefore, it is more effective to control exports and imports in Singapore’s context. Hence, the exchange rate is used as a tool of monetary policy in Singapore instead.

In Singapore, a managed float system is adopted where the Singapore dollar is allowed to fluctuate within a band against a basket of currencies of her trade partners. The central bank will then intervene in the foreign exchange market to move the exchange rate to a desired level by buying up or selling the Singapore dollar using her foreign reserves, when the currency level approaches the bands. For instance, to curb inflation, the Singapore central bank (the MAS) could buy up the Singapore dollar, resulting in an appreciation of the Singapore dollar. This appreciation of the Singapore dollar would lead to a fall in the price of imports in terms of Singapore dollars. This would lead to a lower cost of living as the price of imported products would be lower. With a lack of natural resources, Singapore depends heavily on imports as inputs to manufacture our exports. Therefore, the fall in the price of imports would lead to a fall in the cost of production.

The lower price of imports would also mean that consumers switch away from local goods and purchase more imports instead, assuming they are substitutes. With an appreciation of the Singapore dollar, this would mean that Singapore’s exports are more expensive in foreign currency terms and hence less price-competitive. Assuming demand for exports to be price-elastic, this would lead to a more than proportionate fall in quantity demanded of exports from Singapore. If the Marshall-Lerner condition holds, this would lead to a fall in net exports and hence a fall in AD. The AD curve would shift to the left, resulting in a fall in the general price level, ceteris paribus.

Limitations of Singapore’s Exchange Rate Policy

However, there are limitations to the effectiveness of Singapore’s exchange rate policy. Intervention in the foreign exchange market to generate an appreciation of the currency would require Singapore to maintain significant reserves. A fall in export earnings through an appreciation of the dollar would also lead to a worsening of the current account.

On the other hand, besides fiscal and monetary policies, the Singapore government could also use supply-side policies to tackle both demand-pull and cost-push inflation. With supply-side policies, the aggregate supply (AS) could be increased through labour retraining and education. By increasing the productivity of workers, in the long run, the cost of production would fall, resulting in a rightward shift of the LRAS curve, leading to a fall in the general price level, ceteris paribus. Cost-push inflation can also be curbed using wage and income policies. For instance, a flexible wage structure would enable wages to be adjusted downwards. In Singapore, the National Wages Council (NWC) recommends the level of wage increases. This could control labour costs and ensure that wage increases do not outstrip productivity increases.

However, supply-side policies would not work effectively if AD continues to increase. Therefore, there is a need to use both contractionary fiscal or monetary policy to reduce AD to reduce the upward pressure on prices. In the long run, supply-side policies are important to curb inflation.

Conclusions

In concluding, it should be mentioned there could also be considerable time lags involved in the implementation of policies. It takes time for policymakers to gather data. There could also be implementation lags due to the time taken to implement suitable policies. Once policies are implemented, there could also be impact lags as it takes time for policies to take effect. Also, due to the characteristics of the Singapore economy, it is arguably better to adopt contractionary monetary policy using exchange rates to curb inflation, as Singapore’s monetary policy is in the form of exchange rate policy. This poses a tricky problem, in that, with a small multiplier in Singapore’s context, the effectiveness of fiscal policy is limited, yet the benefits of supply-side policies might only be reaped in the long run. However, it should also be noted that curbing inflation could lead to a trade-off with another macroeconomic objective of unemployment. By curbing inflation, a fall in national output will occur and that might lead to an increase in unemployment. In the final analysis, fiscal policy is only one of many solutions and its impact is massively limited in Singapore, and as such as plethora of policies should be used instead of one single policy.

JC Economics Essays: Tutor's Comments - This paper was written by an Economics tutor friend of mine, who was my former classmate at the NIE (National Institute of Education), doing PGDE (Postgraduate Diploma in Education, JC, Economics specialisation). For part (a) of this question, see the suggested "model" Economics answer why low inflation is an important macroeconomic aim of the Singapore government.  My usual tutor's comments and questions apply here to this essay: what do you like about this paper, and what have you learnt here? Also, what have you studied that is different or similar to what is written in this Economics paper? Using your knowledge of macroeconomics, what diagram must you use here to explain the words? Remember, although this was written under simulated examination conditions by an Economics tutor, you can always think of other ways to improve it, refine it, and make it better suit the context. Also remember that you should know how and when to apply your Economics concepts and theories, rather than just merely memorising and regurgitating. Be sure to think hard, clearly, and properly when writing your Economics essays, especially during examination conditions. Thanks for reading, and cheers!