Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10]

This paper explains possible conflicts in the achievement of macroeconomic aims. When governments utilise demand management policies, there may be conflicts or trade offs amongst those goals. The most common conflict is the conflict between achieving full employment and price stability. There are also other conflicts such as those between achieving internal and external stability. This paper explains various possible conflicts in the achievement of macroeconomic aims when governments use demand management policies, such as fiscal and monetary policies.

First, demand management policies such as expansionary fiscal and monetary policies are often used to achieve full employment. For example, when there is an increase in government spending as governments spend on building infrastructure to boost economic activity, there is an increase in AD and hence an increase in real national income. As more resources are employed, the economy operates closer to full employment. However, there is a trade off as the economy will also face demand pull inflation as demand rises and bids up costs of factors of production. Demand pull inflation is defined as a persistent, sustained, and inordinate increase in the general price level due to increases in AD near or at the full employment level. Many fast developing countries like China with fast-rising AD and increasingly less spare capacity will likely face this conflict. On the other hand, contractionary fiscal and monetary policies can be used to reduce demand pull inflation, but this in turn conflicts with economic growth and employment, thus posing yet another trade off.

Second, as expansionary demand management policies are used to achieve economic growth, the balance of payments may worsen. For example, if interest rates are lowered to reduce costs of borrowing, households will borrow more to spend on consumer durables and firms may also invest more as expected net profitability increases. This leads to an increase in AD and real national income. However, the demand for imports and hence import expenditure increases too. This is because many consumer durables may be imported and firms may also import raw materials and machineries for their investments. Assuming that export revenue does not rise as quickly, the balance of trade worsens. Ceteris paribus, the current account and hence balance of payments worsens. Thus countries like Singapore with high MPM will be more likely to suffer from this conflict. This is because the increase in import expenditure is larger when national income increases. Vice versa, contractionary demand management policies to correct or address a balance of trade deficit can conflict with economic growth and employment.

If a country wants to achieve economic growth, it may choose to use expansionary monetary policy to increase AD. When interest rates are lowered, the cost of borrowing is lowered. This causes households to borrow more to purchase consumer durables such as televisions and refrigerators. This causes C to increase. Firms will also find that expected profitability of investment increases as costs of borrowing falls, given that economic conditions remain the same and returns on investments do not change. Thus I increases. Since C and I are components of AD, AD will increase, resulting in an increase in real national output and hence actual economic growth. However, in an open economy, the lower interest rates would likely result in capital outflow. If there is massive capital outflow as funds move to countries which offer higher interest rates, the capital and financial account will worsen. This leads to a worsening balance of payments. Hence, the desire to achieve actual growth via expansionary monetary policy can conflict with the desire to achieve a healthy balance of payments.

Furthermore, there is also a conflict between achieving a healthy balance of payments and price stability. If a country is facing a deficit in its current account and balance of payments, it may make use of demand management policies to improve the current account. For example, an expenditure switching policy of currency depreciation would help decrease the price of exports in terms of foreign currency and increase the price of imports in terms of domestic currency. As export competitiveness increases, the demand for exports and hence export revenue increases. At the same time as imports become more expensive, consumers switch to purchasing domestic goods instead. Assuming that Marshall Lerner condition holds, when IPEDx + PEDmI >1, balance of trade improves. Since X-M increases, AD increases and general price levels increase too.  However, if the economy is import-reliant, the depreciation of the currency could lead to imported inflation as the prices of imported raw materials increase. This causes the SRAS to fall and the general price level to increase. Thus a healthy balance of payments is achieved at the expense of price stability. An example of this would be Singapore, where imported inflation is likely to happen if the currency depreciates. This explains why Singapore is reluctant to depreciate its currency even when BOT is worsening.

In conclusion, there is a need to consider the use of supply side policies in some cases to minimise these trade-offs, conflicts in macroeconomic goals. Alternatively, a suitable mix of government policies may be considered to mitigate possible unintended consequences which may arise.

JC Economics Essays: Special thanks to W for her contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions. 

This paper explains the possible conflicts amongst macroeconomic goals of governments, and is basically about explaining the various trade offs and conflicts: inflation versus economic growth, internal versus external stability, and other such conflicts. 

There are many good points to learn from this paper. First, it directly addresses the question. It also has many definitions and examples, which suggests that the candidate has learnt her economics material well. The essay is also very well written, and is clear cut, accurate, and to the point; however, perhaps some diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

Discuss if Singapore is among the economies worldwide that have the most to gain from globalisation. [25]

Globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased trade and greater international mobility of factors of production like capital, labour, and enterprise. In other words, globalisation is an extension of international trade, where in addition to increasing trade in goods and services, it also involves rising mobility of resources like labour and capital. Generally, the forces driving globalisation can be linked to improvements in technology resulting in the significant lowering of transport costs and communication costs, and the historical movement away from protectionism after the Second World War. To discuss to what extent a country gains from globalisation, there is a need to analyse the economic benefits and costs of increased trade in products as well as the benefits and costs of increased geographical mobility of labour and capital. This paper argues that, on the one hand, Singapore benefits from international trade and increased labour and capital mobility, but on the other hand these benefits come at a cost, with their limitations and negative impacts.

First, there are benefits from international trade, which many countries can enjoy, but Singapore can arguably enjoy to a greater degree given her small size and openness to free trade. First, Singapore, just like most other countries, can benefit from higher consumption possibilities arising from specialisation and trade according to comparative advantage, which would increase her material living standard. A country is said to have comparative advantage in the production of a good when it can produce the good at lower opportunity cost compared to another country. In this context, the opportunity cost of a good is the amount of another good forgone to produce an additional unit of the good. It can be argued that a rise in the consumption possibilities allows Singaporeans to enjoy a higher material living standard, by having a larger bundle of goods and services to consume, and hence, Singapore stands to benefit economically from globalisation.

Second, trade can be an “engine of growth” – trade enables small or developing economies to overcome the lack of domestic demand in order to achieve fuller utilisation of its resources, and Singapore in its early days was one of the main beneficiaries of this situation. For example, Singapore pursued a policy of Export Oriented Industrialisation (EOI) and reaped economies of scale for producing exports for the world market, which led to low unemployment and high economic growth for many decades in Singapore. In addition, increased efficiency of domestic producers arising from greater competition from imports and also the exploitation of economies of scale are also other benefits of trade. This increase in both AD and AS, leading to long run sustained, and non-inflationary economic growth, was possible because of trade. Conversely, it can be argued that countries such as Latin America after WWII which were inward-looking and focused on Import Substitution Industrialisation (ISI) were amongst economies which did not benefit from globalisation.

However, there are costs of increased free trade which Singapore has to deal with, which may not affect much larger economies. First, there is the danger of potential over-reliance on external demand resulting in greater macroeconomic instability. Singapore’s macroeconomic goals of low and stable inflation rates, economic growth, and low unemployment may easily be adversely affected or suddenly impacted by worldwide recessions or worldwide booms. This, however, is inevitable given that Singapore is a small and open economy which is highly dependent on trade as an engine of growth, and therefore when incomes fall in other countries, Singapore can be rapidly and adversely affected by falling export revenue, which lowers AD and results in unemployment and falling growth, while conversely booms in other countries may lead to rising demand-pull inflation in Singapore. Larger economies, conversely, may not be as affected as Singapore.

Furthermore, rising structural unemployment is another cost of international trade, as trade causes less competitive sectors to decline and more competitive sectors to expand. Structural unemployment refers to the situation of a mismatch of skills in the economy, where workers in the declining sunset industries are unable to find jobs in the new, rising sunrise industries due to a lack of requisite skills and training. For example, due to rapid structural changes in Singapore’s economy as a result of trade, there are many older and relatively unskilled workers who are unable or unwilling to upgrade their skills, and therefore cannot take up many of the new jobs that are available. Hence, there are real and pressing costs to the benefits of greater free trade arising from globalisation.

In addition to more global free trade, globalisation also impacts factor mobility – it can benefit Singapore in terms of the increased flows of labour and increased capital mobility, all of which help Singapore’s long run potential growth. Let us first address labour. First and foremost, labour shortages in Singapore can easily be made up through increasing the numbers of Foreign Talent or foreign workers. For example, in fields such as construction and nursing in healthcare, local domestic shortages are easily made up through imports of foreign labour. Hence, it would seem that increased labour mobility benefits Singaporeans.

Second, with respect to capital, Singapore benefits from increased capital accumulation, arising from increased Foreign Direct Investment as well as short term financial capital inflows. Capital accumulation enhances long-run growth as it enables a country to increase the quantity and quality of capital, and countries like Singapore can increase their levels of capital, technology and skilled labour. For instance, MNCs investing in Singapore bring about capital investments, technology, and skilled labour to Singapore, increasing her potential capacity and thus raising her potential growth. Furthermore, capital owners in Singapore can earn higher returns through investing in developing countries, especially in neighbouring ASEAN countries, and lower skilled labour from developing countries could earn higher wages from working in Singapore. Therefore it would seem that while foreigners benefit from globalisation’s impact on Singapore, Singaporeans benefit much more.

However, there are also costs of increased labour mobility. First, it can be argued that there would arise a greater degree of structural unemployment in Singapore as domestic workers may be unable to compete with cheaper foreign workers. This applies to both skilled and unskilled labour in Singapore. For instance, the lower-skilled elderly workers would be hardest hit by the influx of cheaper foreign labour, who would depress wages.

This leads to greater income inequality in Singapore, and by extension to developed economies worldwide: while developed economies’ lower-skilled workers are often internationally immobile, poorly trained, and uneducated, and thus would face depressed wages due to a rapid influx of cheap low skilled foreign labour, most developed economies’ higher-skilled labour is internationally mobile, often headhunted and recruited worldwide, and hence face rising wages rise due to increase global competition for such labour. For instance, in Singapore, the lower-skilled elderly workers are often facing structural unemployment or employment in lower-end jobs, whereas affluent Singaporeans are able to accept jobs worldwide due to globalisation. The resultant consequence is that the Gini Coefficient in Singapore is consistently above 0.4, which suggests rather high income inequality. This inequality may be a major cost of globalisation.

Furthermore, compounding the issue of income inequality is the real and pervasive social cost of Singapore adapting to the influx of foreign labour, which could for example strain Singapore’s social amenities. For instance, housing, schools, hospitals, and recreational facilities are often overcrowded due to rising population growth; there has often been social discontent due to erosion of local culture, values, and way of life. Therefore labour mobility brings about costs and benefits to Singapore.

There are also real and pervasive costs of increased capital mobility. First, allowing free movement of short to medium term capital can result in exchange rate fluctuations, and, second, stock and property market bubbles which causes increased macroeconomic instability. For instance, because Singapore is a financial hub with free capital mobility, there are often rapid capital inflows leading to asset bubbles in the stock and property markets, especially due to the USA’s Quantitative Easing and expansionary monetary policy. In terms of exchange rate fluctuations, these are often smoothed out through the use of Singapore’s managed float policy which limits the volatility of free, flexible exchange rates. Therefore capital mobility brings out benefits and costs to Singapore.

In conclusion, Singapore has more to gain from globalisation compared to larger economies, because first and foremost, without trade, Singapore’s small yet open domestic market will be insufficient or inadequate to generate much national income, reap much economies of scale, and experience much product differentiation. Singapore therefore attains most of the benefits of trade while possessing the policy tools and strategies to minimise the costs of freer trade. Being geographically small, highly urbanised, having good transportation infrastructure, minimal social security support, and a relatively well educated workforce, it is comparatively easier for Singapore to retrain and re-skill its workers to counter structural unemployment arising from increased globalisation. Due to strong economic growth in the past, a prudent and efficient government and a high savings rate, Singapore arguably has more than sufficient resources to invest in social amenities in order to cope with the rising population caused by immigration. While unrestricted flow of short-term capital is necessary for Singapore to function as a financial centre, its substantial foreign currency reserves allow Singapore to be relatively safe from potentially destabilising speculative attacks on its currency. The downside is that being a developed economy, it is more likely to experience worsening income distribution than a developing economy and Singapore finds it hard to significantly improve income redistribution without negatively affecting the incentive to work and invest. Therefore it seems clear that Singapore has the correct, specifically targeted policy tools to ensure that it ameliorates the negative impacts of globalisation while maximising the gains. Overall, it seems Singapore has significantly much more to gain than lose from globalisation and thus could arguably be one of the countries which can gain most out of globalisation.

JC Economics Essays - This economics question is adapted from an actual H2 Economics A level examination question, and this is a specially crafted response to the question co-written by two economics tutors for an economics tutorial on international trade and globalisation. The main topic in this economics essay is globalisation. Looking at the essay response, what are good economics arguments that can be used for examinations? What is good about this economics paper that can be adapted and used in economics assignments and tests? What are areas that need to be explained further or further explicated clearly? Remember to always answer the question that is posed, and think of ways in which the question can be approached. Thank you for reading and cheers!

Many economists argue that achieving a low and stable rate of inflation is the single most important macroeconomic objective for governments. Discuss the view that a government’s fiscal and monetary policies should be focused primarily on achieving a low and stable rate of inflation. [15]

A government’s fiscal and monetary policies can take on two main forms; expansionary and contractionary demand-management policies. Fiscal policy refers to the manipulation of government spending and direct taxes, while monetary policy refers to central banks manipulating money supply and thus interest rates, to affect the AD of an economy. To argue that these demand management policies should lean more towards keeping inflation low and stable essentially implies that these policies must necessarily be contractionary. A low and stable rate of inflation translates, for most governments of developing countries, to a rate of about 2-3%. This paper argues that, while on the one hand one could agree that in light of the numerous benefits of low inflation, the monetary and fiscal policies of a government should be biased to achieving this end, on the other hand it is imperative to consider the other macroeconomic goals – low unemployment, high economic growth, and a stable balance of payments – a country may also wish to pursue, and in the light of these, may want to reconsider the focus of these demand-management policies.

First and foremost, a government’s decision to focus fiscal and monetary policies on achieving low inflation has many benefits. Primarily, a low inflation rate protects the real income of the majority in the country. Secondly, affordable prices serve to cater to both low and high income groups who can satisfy their basic needs or save, and therefore does not widen the income gap. A low inflation rate also encourages savings at the expense of consumption, since in a high-inflationary environment, the general price level rises rapidly, which implies that rapidly rising prices – especially those of big-ticket items such as houses or cars – mean that consumers will try to make purchases sooner rather than later, before they become even more expensive. High inflation then creates a disincentive to save. Savings together with the atmosphere of stability, confidence and security that low inflation provides promotes investment, which in turn promotes capital accumulation, and hence long run economic growth. 

It can thus be argued that another argument for low inflation is that low and stable inflation in fact stimulates economic growth. This would translate to an increase in productive capacity with the building of more factories, hence contributing to the potential growth of the economy, as well as an increase in employment as firms seek out more workers to increase production, as labour is a derived demand. Wages also increase as firms seek to improve productivity which would increase the real income of the masses and hence improve material standards of living. Increase in real income would in turn translate to higher levels of consumption and investments that would, through the multiplier process, cause an additional increase in the national income of the country, more than the initial injection amount. 

However, despite these benefits of inflation, given a country’s current economic situation, there may be other more pressing macroeconomic objectives that need to be met that conflict directly with the objective of low inflation rates. Some pressing problems a country may face include firstly low economic growth and material standard of living; a recession, or perhaps the desire of a developing country, one such as China and India, to catch up with the more advanced economies of the world. It is thus not wise in such situations to focus contractionary monetary and fiscal policies on achieving low inflation as it is relatively less important to them at their level of development at the present time. Another problem countries, such as Indonesia and the Philippines, may face is massive unemployment, the situation where people are willing and able to work but are unable to find employment at current prevailing wage rates, and uncontrollable birth rates that could lead to social upheaval, political turbulence, and overall unrest, especially if the government chooses not to address the problems at hand. 

Yet another problem faced by a country would be having a huge current account surplus, where exports far exceed imports. Examples of such countries include Japan and China who have been registering record current account surpluses, to the extent that they have proven inflationary, and are under pressure to increase their imports. There is hence a conflict between inflation and maintaining this surplus or giving in to the demands of the rest of the world that governments need to choose between. These conflicts between the other macroeconomic goals of a country and inflation need to be thoroughly analysed first before a conclusive decision can be made.

In conclusion, when it comes to competing macroeconomic aims, there is never an easy answer of whether fiscal and monetary policies should be targeted at achieving low inflation or some other macroeconomic goal, given that there are real and pressing trade offs. Each macroeconomic aim is important in its own way and deserves a policy response from the government. Inflation in the short run is inevitable and a government must carefully consider reducing or ameliorating high inflation. For a country facing a recession, with low growth and unemployment, as well as countries that need to catch up with the more developed economies of the world, focusing monetary and fiscal policies on expansionary intent would be more beneficial. In the light of the problems of slow growth and inflation, a government would be better off choosing to ignore the lesser of the two evils, in this case inflation. Slow economic growth brings with it, not only unemployment but lower standards of living that could translate to social and political turbulences that could impede, not only the efforts of the government in bringing social, political and economic stability to the country, but ultimately hinders the progress of the nation as a whole. Inflation thus becomes a necessary evil by-product of pursuing expansionary monetary and fiscal policies that counter the greater evil of a recession and its dire consequences to the country. 

JC Economics Essays - H2 A level economics essay about the macroeconomic goals of governments (part (a) was focused on the causes of inflation) with economics tutors' comments. This economics essay is about the macroeconomic aims and goals of governments and is more broad-based, exploratory, and wide ranging than an "explain" question. Do remember to always take note of the command word and the keywords in addressing the economics question. There can be several ways of approaching this economics topic, but this essay approach seems to be the best and most effective, most productive way to discussing the topic at hand. For improvement: it could bring in more economics concepts, such as Tinbergen's Principle, or could bring in the idea of addressing efficiency versus equity. However, overall, this economics essay is a well written piece of work that adequately addresses the requirements of the question. Remember: always answer the question posed. Do also think of ways in which you would better answer this economics question, or how you would make improvements to this particular method of answering. What would an alternative approach be? How effective is this method of writing? Thank you for reading and all the best for your economics revision. 

Many economists argue that achieving a low and stable rate of inflation is the single most important macroeconomic objective for governments. Explain how a high rate of inflation can be caused. [10]

High inflation as a problem is essentially is a persistent, sustained, and inordinate increase in the general price level (GPL) of an economy. Alternatively, however, inflation can be thought of as a percentage increase year-on-year in the GPL, commonly measured using the Consumer Price Index (CPI), which measures the changes in the price level of a weighted basket of goods and services consumed by an average household. This paper argues that a high rate of inflation can be caused by demand-pull and cost-push inflation. Demand-pull inflation occurs where aggregate demand (AD) rises when the economy is near or at full employment, while cost-push inflation occurs when production costs rise, independently of aggregate demand. 

First, let us address demand-pull inflation. Figure 1 shows demand-pull inflation where persistent, sustained, and inordinate increases in AD, near or at the full employment level, causes prices to rise persistently from P1 to P4. When AD increases, as depicted by a rightward shift of the AD curve, both output and prices increase when there is idle resources, or unemployment. Nearer and at the full employment level, there is no increase in real output as AD increases from AD3 to AD4 as existing resources are fully employed.

THINK: how do you represent demand pull inflation on an AD-AS diagram? 

Demand factors that could possibly contribute to this form of inflation include both non-monetary and monetary factors. Non-monetary factors include an increase in either components of AD, namely consumption (C), investment, (I), government expenditure (G), or net exports (X-M), because AD = C + I + G + (X-M), or a combination of both whereas monetary factors include a rise in the money supply, leading to a fall in interest rates.

First, expectations about the economic outlook, such as optimism about the health of the economy or a rising stock market, could also affect households and firms’ consumption and investment, with C and I increasing if the overall economic outlook is positive. 

Second, and more importantly, in the case of a rise in money supply, this would lead to lower interest rates and exchange rates to promote economic growth and employment. A lower interest rate would cause the cost of borrowing to decrease, and households would find it cheaper to borrow to consume, and firms would find it cheaper to borrow to invest, thus both C and I would rise, at the expense of savings. Since AD = C + I + G + (X-M), the increase in both C and I would cause AD to increase and shift to the right, hence promoting actual growth. Lower interest rate would also cause depreciation in the country’s currency and an increase in net exports (X-M), also promoting economic growth.

Third, rising AD could also arise due to an excessively expansionary monetary or fiscal policy as countries pursue macroeconomic goals such as high and sustained economic growth or low unemployment. In terms of expansionary monetary policy, governments could get too ambitious in adopting such policies and end up creating inflation by having drastic decreases in interest rates, or rapid depreciation of exchange rates for instance. In terms of expansionary fiscal policy, excessive increases in government spending could also increase G, and thus AD increases and shifts to the right.

On the other hand, cost-push inflation; a persistent rise in costs causing a sustained increase in the general price level is shown below:

THINK: how do you represent cost push inflation on an AD-AS diagram? 

A persistent, sustained, and inordinate increase in production costs causes aggregate supply (AS) to shift upwards, from AS to AS1. Producers respond partly by raising prices, partly by passing the costs on to consumers, and partly by cutting back on production. Real output falls while prices rise to P1. Possibly due to supply shocks such as increases in import prices, AS could fall further and prices would rise to P2, while real output falls further to Y2.

Factors that cause cost-push inflation could include, first, the phenomenon when wages rise faster than productivity, called wage-push inflation. When very strong trade unions demand an increase in wages that exceeds current productivity, unit costs of production and hence general prices of goods and services increase. The cost of living thus increases and trade unions in turn ask for higher wages to maintain their real income. In doing so, the cost of production rises further and the higher cost is passed on to consumers simultaneously, thus leading to a development of a wage price spiral.

Secondly, another major supply factor is imported inflation. For countries that heavily import raw materials and necessities, such as Singapore, a small and open economy which is heavily dependent upon imports, an increase in the world price of these goods is a significant source of inflation. Higher world prices can be caused by a decrease in supply due to poor crops, for example, or even from the actions of producers who restrict supply. Oil prices for example rose due to OPEC’s restriction of oil supply to the world market.  These higher prices are passed onto the consumers of countries importing these inflated raw materials and necessities, hence resulting in imported cost-push inflation.

Finally, cost-push inflation also results when the government raises indirect taxes such as GST for example. A firm’s cost of production would increase hence pushing up the general price level, and causing inflation.

In reality however, these causes of inflation may not be discrete and inflation could be multi-causal. In conclusion, there are many causes of inflation but they can be classified mainly in terms of demand-pull and cost-push inflation. 

JC Economics Essays: This economics essay is a contribution to an H2 A Level Economics essay question on explaining the causes of inflation with economics tutors' comments. Inflation is an important economics topic, especially because often times the A level examination can test students to explain the causes of a macroeconomic problem. The causes of a macroeconomic problem help governments find solutions to these economic issues.

What do you think were the strengths of this economics essay, and did the economics student explain the economic concepts of demand pull and cost push inflation effectively, accurately, and with real world examples to illustrate his point? Do you know what economics diagrams you could have drawn to ensure that the points and arguments are well illustrated? What do you think of this economics paper? How would you improve further on it? Overall, this is a well-crafted economics paper that explains inflation very carefully and accurately, using solid economic analysis.

Thank you for reading, and cheers. 

Discuss with relevant examples the best way to sustaining long run economic growth for a small country, such as Singapore, with an aging population. [25]

Economic growth is defined as an increase in the real output of an economy over a period of time. Positive growth means that real output has increased while negative growth means that real output has fallen. Sustaining economic growth means long-run growth, defined as the rate of growth in real output of a country over a extended period of time. For long-run growth to occur, productive growth capacity needs to rise which means that there should be potential growth. Therefore, a sustaining economic growth needs not only actual growth but also potential growth. This essay attempts to explain the impacts on the economic growth due to small country with aging population, various methods to counter these problems and discuss about the best method to achieve a sustaining economic growth.

An aging population in a small country results in two major problems: shrinking labour force and decreasing national income. When there is a shrinking labour force, the burden on the productive workforce in supporting non-productive residents would rise. This means the number of new entrants into the workforce is smaller than the number of people retiring from it. Shrinking size of the workforce results decrease in labour supply. As a factor production, shrinking labour force leads to AS curve to shift left. Therefore, the potential growth slows down. Meanwhile, more retirees have lower income than the time when they work. They feel poorer to consume. Hence, consumption decreases. Shrinking workforce means that firms have more difficulty finding workers, so they might downsize, close down or relocate. They will not want to invest anymore. A decrease in consumption and investment results a decrease in AD as AD = C + I + G + (X – M). Hence, actual growth is reduced. Both AD and AS are likely to decrease due to an aging population; the economy would contract and economic growth would be negative. Hence, there is a need to raise AD and AS. 

[Insert diagram on increase in AD and AS]

From the diagram above, when the AS curve shifts to the right, at full employment level, an increase in AD will not cause demand-pull inflation, hence, a sustaining economic growth is achieved. 

To increase AD, there are several methods, namely, expansionary fiscal policy, expansionary monetary policy and exchange rate policy. 

Expansionary fiscal policy involves raising government spending on infrastructure like transportation, public utilities and telecommunication and on merit goods like education and healthcare. Cutting direct taxes can also have beneficial effects on long run growth. Cutting personal income taxes raises the monetary returns to work thereby increasing the incentive to work harder. Furthermore, more disposable income generates greater savings thereby increasing the funds available for investment. Lastly, cutting corporate taxes raises firm’s post tax profitability and hence their incentive to invest. As AD = C + I + G + (X – M), a increase in C and I and G will then raise AD.

The first limitation of expansionary fiscal policy is that it results in government debt as the government has to borrow to finance its budget to finance a budget deficit. Hence, future welfare is actually being sacrificed for the sake of raising current welfare. Secondly, in a small country with small multiplier (k), expansionary fiscal policy is very costly and not very effective. For instance, Singapore has a high MPS as we have compulsory savings like CPF and also a high MPM due to our dependence on imports. Since k = 1/(MPW) and MPW = MPS + MPT + MPM, Singapore has a high withdrawal and therefore a small multiplier. Thirdly, there is crowding out effect. Expansionary fiscal policy involves running a higher budget deficit that is probably financed from increasing borrowing. The demand for loanable funds rises and hence raising interest rates. This deters consumption (C) and investments (I) and also causes the currency to appreciate, thereby curbing net exports (X – M). As AD = C + I + G + (X – M), AD decreases due to decrease in C, I and (X – M). The expansionary effects of the budget deficits are therefore negated by a reduction in consumption, investments and net exports. Fiscal policy also has limitations like time lags and tax insensitivity. 

Expansionary monetary policy refers to increase money supply by Loanable Funds Theory, hence boost borrowing for consumption and investment. Lowering interest rates also causes hot money outflow, which causes the currency to depreciate because the demand for currency decreases hence boosting net exports. As AD = C + I + G + (X – M), AD is increased due to increase in C and I or (X – M). 

One of the limitations of expansionary monetary policy is the liquidity trap which refers to the situation where interest rates are already so low such that the further cuts in interest rates are unlikely to have any impact in stimulating borrowing. At the extreme, when interest rates hit zero, this means that there is no more room for further interest rates cuts and expansionary monetary policy stops being a viable policy tool. Meanwhile, small country such as Singapore is usually trade dependent. With free capital mobility, and fixed or managed exchange rate, small countries find it hard to implement monetary policy because of the economic trilemma. 

Exchange rate policy can be used to increase AD by depreciation of the currency. When the exchange rate is lowered, consumers find imports more expensive compared with domestic products, hence consume fewer imports. With lower exchange rate, country’s exports are more competitive and the quantity demanded for its exports increases. Hence an increase in net exports results in an increasing AD as AD = C + I + G + (X – M).

However, depreciation of currency will cause imported inflation which is very harmful to import-dependent small countries. These small countries prefer to have fixed or managed exchange rate, hence exchange rate policy may not be used. 

Governments can also use supply-side policies to ensure long-run economic growth. To counter the decreasing AS due to shrinking workforce, governments can choose to increase the quantity of labour or improve the quality of labour. 

The first option is to increase the size of the population with higher birth rates. i.e. pro-natal policies. Tax rebates and subsidies can be given to encourage more births. The labour market can also be regulated to allow for more flexible work arrangements so that parents can better balance work and family commitments. The size of the working population (labour force) can be increased by raising labour force participation. This can be done with policies to encourage non-working women and retirees to re-join the labour force. One way to do so is to increase the retirement age. Policies should also create more flexible and less intensive work arrangements which make jobs less demanding for older workers, hence encouraging them to remain in or to re-join the workforce. 

Besides trying to raise birth rates, a faster and easier way of increasing the size of the labour force is to allow more inflow of foreign labour. i.e. increase immigration. Allowing more inflow of higher skilled foreign labour like doctors, managers and engineers usually does not face that much social and political resistance. Being more educated and generally small in numbers, it is arguably easier for such foreigners to integrate into the local society. To improve the quality of labour force, governments have to increase labour productivity and occupational mobility. This involves two main elements. i.e. education and training. 

However, these supply-side policies have limitations as well. It is very hard to increase birth rate due to the fact that the opportunity cost of having children in terms of the sacrifice in consumption, leisure and career advancement is often too high. Re-joining the workforce is not easy as this cannot prevent people from getting old and retiring early. Immigration creates social tensions and depresses the wages of domestic low skilled labour, thus worsens the country’s income distribution. Education programs typically take many years to implement and their effects are felt only much later. Most of the labours and companies are reluctant to take and set up workshops for training. 

In conclusion, to achieve sustaining economic growth in a small country with aging population, the best way is to use supply-side policies to increase AS which is the root cause of slowing economic growth. Expansionary fiscal policy can be considered as one of the better choices if the small country has a relatively large multiplier hence it will not be so costly to use fiscal policy. Monetary policy is usually not a good choice due to the fact that small country is usually trade dependent and is limited by the economic trilemma. Small country which is usually import dependent will not choose to depreciate its currency. Therefore, supply-side policy is considered as the best way to sustaining economic growth for a small country with an aging population. 

JC Economics Essays - H2 'A' Level standard essay on the Singapore macroeconomy: Economics Tutor's comments. Macroeconomics essays covering the various macroeconomic aims and goals of governments, as well as the demand management policies and supply side policies are important. Often, macroeconomics essay topics will focus on either the goals as a standalone topic, or in conjunction with economic policies. Economics policies often come accompanied with some economics issues or economics news in a preamble, but economic policies can be assessed also on their own theoretical merits. (In a way, that's the beauty of macroeconomics - it can be quite theoretical and while often macro is in the news, and often catches attention with the headlines, in economics examinations macroeconomic policies can be considered theoretically too. The thrill of theory is often too beautiful for economists to ignore.) In any case, the usual economics tutor's questions apply: what are the strengths and what are the weaknesses of this economics paper? Does the student develop her arguments cogently, clearly, and build on theory and real world economic examples? Think about how you could help this student write an even better essay, or how you could help the student to get the highest marks possible. Having said that, this economics essay is very well written for a variety of reasons. The materials presented are wide ranging and very well applied to Singapore's context. There is a lot of economic theory, but also examples as well. The conclusion is nuanced, evaluative, and generally very well written. Note: this essay was written under examination and timed conditions by an actual A level student in a class Economics H2 test (not an economics assignment). Special thanks for AG, SS, and other students for their kind feedback and invaluable contributions and suggestions. 

Discuss the likely causes of inflation in Singapore. [15]

Introduction: Causes of Inflation in Singapore

This Economics paper discusses the likely causes of  inflation in Singapore. First, a few definitions are in order. 

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. 

Demand Pull Inflation in Singapore 

What is demand pull inflation? Firstly, demand-pull inflation occurs in Singapore when Aggregate Demand (AD) rises as the economy is at or near the full employment level of national income. 

Why would AD rise, or what are the factors causing AD to rise? There are many reasons why AD will rise, but they can all be attributed to the components forming AD, which are C, I, G, and (X-M), as AD = C + I + G + (X-M). 

[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. 

Secondly, AD will also rise when there is a decrease in personal income tax as people will tend to have more disposable income and this increases their purchasing power and will cause consumption to increase. Since AD comprises C + I + G + (X-M), which are consumer spending, investment spending, government spending, and net exports, a rise in consumption and investment spending will cause AD to rise. This is slightly more likely in Singapore's case. 

Lastly, factors like increases in government spending (G), for instance on the Singapore Armed Forces or Singapore Police Force, and increases in net exports (X-M), due to foreigners buying more of our domestically produced exports, will also cause AD to rise, leading to demand-pull inflation in Singapore as the GPL increases. This is also quite likely in Singapore, but there are also supply side factors to inflation to consider. 

Cost Push Inflation in Singapore

On the other hand, demand is not the full picture when it comes to inflation. 

What is cost push inflation? Cost-push inflation occurs when Aggregate Supply (AS) rises due to economy-wide rises in production costs. As labour cost is often the largest component of total costs in Singapore, a sudden rise in wages can cause significant cost-push inflation in Singapore. 

However, having said that, rising food, fuel, property prices, exchange rates and the foreign sector are also factors that cause AS to rise, leading to cost-push inflation as the general price level increases when the AS curve shifts upwards. 

[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?]

Imported Inflation in Singapore

Imported inflation can lead also lead to cost push inflation. As Singapore is a small and open economy with limited natural resources (factors of production), she has to depend heavily on imports from other countries for both her consumption goods and factor inputs. In fact, Singapore's exports are made from imported inputs. Thus, the biggest threat to inflation in Singapore would be the depreciation of the Singapore Dollar (SGD). This could be due to lack of export competitiveness which lowers the demand for Singapore's currency, or this could also be due to Singapore dollars flooding the foreign exchange market. 

If the Singapore dollar depreciates too quickly, it causes severe imported inflation which impacts households directly through rising goods, food, and energy prices. Imported inputs also become more costly, thus raising production costs and product prices, and since Singapore's exports depend on imported inputs this has a massive knock on effect on Singapore's exports.

With small domestic market, highly export-oriented Singapore is dependent on external rather than domestic demand. If the Singapore dollar were to appreciate too quickly, her exports and hence AD would plummet and this potentially could trigger a recession. Hence, Singapore’s central bank, the Monetary Authority of Singapore (MAS) has a primary objective to promote price stability through Singapore's version of monetary policy, which is a kind of exchange rate policy. 

[NOTE: In order to effectively manage Singapore’s exchange rate, the MAS could potentially buy back its own currency from the foreign exchange market which reduces the money supply to raise the Singapore exchange rate. Conversely, the MAS also could sell domestic currency on the foreign exchange market which raises the money supply to lower the Singapore exchange rate.]

Conclusion

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. 

JC Economics Essays: Tutor's Comments - This Economics essay is approached in a rather different way from this other essay, also here on this site, on inflation in Singapore's case: Singapore's Inflation: Explain the causes of inflation in Singapore. Compare and contrast. Why is this the case, which economics essay approach is better, and how could you improve on either of these papers? Do also think about why the approaches from different students can vary considerably when answering or responding to the same question. Which approach or angle is more useful and relevant in crafting an excellent economics essay, especially when under time pressure? Also, there are a few small problems with this economics essay - can you spot these small errors or mistakes, and improve on these flaws or inadequacies? Think about it for a moment. If you can identify the mistakes or the small inadequacies, plus suggest improvements upon them, then clearly you are in a good position and have really understood the material. This economics essay is a contribution from my companion website and has been adapted and amended a bit. Thanks for reading and cheers! 

Discuss monetary policy and fiscal policy’s importance for the USA, in the light of stagflation.

Introduction to Monetary and Fiscal Policy, and Stagflation

Monetary policy means to control the money supply and interest rates to affect aggregate demand (AD) in an economy, according to what is known as demand-management. Fiscal policy is another demand-management policy that deals with manipulating government spending and direct taxes so as to affect AD. Stagflation is defined as a situation of low economic growth with high inflation - both stagnation and inflation. Inflation is defined as a persistent and sustained increase in the general price level (GPL), that poses a problem to society because this increase in GPL is sustained and inordinate. 

This Economics paper discusses the strengths and limitations of monetary and fiscal policy, each in turn, in relation to stagflation in the USA. This paper concludes that both policies are equally important for the US, but they should be used in conjunction with supply side policy. 

Monetary Policy

Monetary policy works, in theory, by two ways. First, according to the classical direct transmissions mechanism, increases in money supply help consumers spend more and firms invest more directly because they have more money and they feel richer. Second, according to the indirect transmissions mechanism, increases in the money supply lower the interest rate, which lowers the cost of borrowing. Since it is cheaper for households to borrow money to consume, and cheaper for firms to borrow money to invest, C and I both increase, and since AD = C + I + G + (X-M), then AD increases, which helps to solve unemployment and which also causes actual economic growth. 

Unemployment is defined simply as the situation where people who are able and willing to work cannot find jobs, or they are unwilling to take up the jobs at the wage rate given to them. Actual economic growth merely refers to increases in real output at the macroeconomic level caused by increases in AD. Hence, it would seem that prima facie, monetary policy can help solve unemployment and lack of growth in the USA, and hence fight stagflation by countering the “stagnation” part.  

Limitations of Monetary Policy

However, monetary policy might suffer from the liquidity trap, which means that beyond a certain point interest rates cannot be lowered further, thus hampering the workings of monetary policy. If interest rates cannot be lowered, the costs of borrowing cannot be reduced. This can be seen in an analysis of the liquidity preference theory put forth by Keynes. 

Fiscal Policy

On the other hand, Keynesian fiscal policy works when governments spend more, for instance on national defence and education, or when they tax less, through lowering income and corporate taxes. Increasing G raises AD directly given that G is one of the components of AD. Lowering direct taxes cause C and I both to increase, and since AD = C + I + G + (X-M), then AD also increases, which helps to solve unemployment and which also causes actual economic growth. Because of the multiplier effect, where the multiplier means that national income increases by a factor more than the initial increase in the injections into the economy, the USA’s AD will increase, promoting and boosting growth. 

In the USA, both C and I are large components of the AD. It can also be argued that G is also a big component given that the USA has a large military. Hence, it would seem that prima facie, fiscal policy can also help solve unemployment and lack of growth in the USA, and thus fight stagflation by countering the “stagnation” part.  

Limitations of Fiscal Policy

However, there are also limitations to fiscal policy, one of which is the famous “crowding out effect”. If governments run a budget deficit, and the USA is arguably famous for running both a budget as well as a trade deficit for many years, then they will have to borrow money. According to the loanable funds theory, this increase in demand for funds by governments will crowd out private consumption and investment, and hence C and I will fall despite G increasing, thus negating the effects of fiscal policy. The US government would be “crowding out” private consumption and investment. 

Supply Side Policies?

Hence, supply side policies that target the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise, could be better for the USA in handling stagflation. Subsidies for energy and other natural resources, increases in the US labour force in both numbers and quality, for instance by increasing American high school education and human capital, and increases in both the quantity and quality of American capital, plus encouraging immigration especially of entrepreneurial foreigners, would help massively. 

These methods and means would shift the AS curve both down and to the right and help solve cost push inflation in the USA. These would be better because they would solve both the “lack of growth” and “high inflation” aspects. 

Conclusion

In conclusion, perhaps both demand side and supply side policies should be used hand in hand, and together they can help solve stagflation because they encourage both potential and actual growth, which is great for the American economy. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay on monetary policy and fiscal policy, set in the context of the USA, is interesting and provides a suitable level of analysis. There are consistent references to the USA as well as relevant macroeconomic policies, and the underlying economic reasoning behind those policies. There are also well-defined terms that are explained clearly. Note: this particular Economics essay on the USA is related to the earlier Economics question on stagflation: Explain possible causes of stagflation in the USA. However, my usual question applies here: if you were the Economics tutor grading this Economics paper, what areas of improvement would you suggest? Let's look, for example, at the conclusion. While this essay's conclusion makes a good argument and tries to justify the argument made, there is a lack of detailed evaluation which could possibly make it an even better essay. What other areas of improvement for this Economics essay do you observe or notice? Thanks for reading and cheers!

Explain possible causes of stagflation in the USA.

Explain possible causes of stagflation in the USA.

Introduction - Possible Causes of Stagflation in the USA

Stagflation, as the name suggests, refers to the macroeconomic situation of low economic growth and high inflation – stagnation and inflation occurring at the same time. The background to this essay is that from 2008-2010 due to the housing bubble crisis in 2007/2008 in the USA, there have been massive rates of unemployment, raising the jobless rate.

This Economics essay argues that the possible causes of stagflation in the USA can be traced to mainly cost-push inflation.

Cost Push Inflation?

First, general cost push inflation could have resulted in stagflation in the United States. Inflation can be defined as a sustained increase in the general price level (GPL), and it could be a problem when the increase in the GPL is sustained, persistent, and inordinate.

Inflation can be both demand pull and cost push, the first affecting the aggregate demand (AD) which equals consumption, investment, government spending, and net exports or C + I + G + (X-M), by shifting it to the right, and the second affecting the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise.

For cost push, increases in unit input costs in the factors of production will lead to the AS shifting upwards, lowering employment, and simultaneously raising the rates of inflation. This can be explained using the AD/AS diagram demonstrating cost push inflation.

For example, first, higher costs of inputs such as oil could have contributed to this situation, because oil is fast running out, and the demand for oil is relatively inelastic, which could lead to high volatility and high prices. Second, wage costs could possibly have spiralled in the USA. Third, capital costs could have increased, but this is highly unlikely given that this is the USA with its technological advantages and its huge supply of capital.

Imported Inflation?

Imported inflation, which generally also leads to cost push inflation, but can also lead to demand pull inflation in some instances, might not have been a major influence of stagflation in the United States. This is because while the USA might accuse China of artificially having low exchange rates, thus increasing their imports of Chinese goods and probably causing some unemployment in sunset industries in the USA, the decreasing AD that results from this situation would actually ease inflation, and not cause stagflation. 

Furthermore, the United States of America is a large country and does not depend on imported inputs that much for the production of her own products or exports. Possibly, the rise in global food and oil prices (commodity prices have been rising internationally) could lead to some imported inflation in the USA, which would have possibly also contributed to shifting the AS curve upwards, increasing GPL.

Quantitative Easing (QE)?

Second, excessive printing of money from the QE exercises (quantitative easing), from around 2008 to 2012, by the USA Federal Reserve (USA’s central bank) could have also led to stagflation in the USA because there could be the case of too much money chasing too few real goods. Also, it can be argued that according to the Fisher Equation, where MV = PT, increases in the money supply cause inflation to occur, corroborating Milton Friedman’s famous statement that “inflation is always and everywhere a monetary phenomenon”.

This might have contributed to the high inflation in the USA because low interest rates encourage borrowing for consumption and investment, which would have caused demand pull inflation to also occur; also, according to the classical direct transmissions mechanism, more money in the hands of consumers and firms would lead to higher C and I, thus boosting AD, which might have contributed to inflation. This could have led to AS shifting upwards due to asset bubbles, which raise the costs of production.

Conclusion

Hence, in conclusion, cost push inflation is likely to be the main cause of stagflation in the USA. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay is about the causes of low economic growth and high unemployment in the USA, and is clearly in reference to recent events, in recent years (around 2007 - 2012). There are many good points about this Economics essay, such as its references to Milton Friedman and the many excellent, relevant, real world examples. However, put yourself into the shoes of an Economics tutor - what would you say were the weaknesses of this Economics paper, and how would you remedy them? Other than the fact that an Economics diagram could have been used (the AD/AS diagram which is already highlighted and put in bold fonts in the essay), what else could have been done better? While this Economics paper is good, how can it be made even better? 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!

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!