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Section C: Essay Questions Essay Qn (2007 GCE A Level) 1a) To be considered successful, an economy needs to achieve low unemployment,

low inflation and stable economic growth. Explain this statement. [12] b) Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy. [13] a) Although the question only stated 3 macroeconomic objectives, we know that the success or performance of an economy is subject to its performance in the various macroeconomic goals. Therefore it is important for the answer to not only examine the importance of achieving the goals of the domestic sector but also how the performance of the domestic sector may impact the external sector (BOP and foreign exchange). Introduction - Identify and explain the 4 or 5 macroeconomic objectives of the economy and identify low unemployment, low inflation and stable economic growth as the internal goals of the economy. - Achieving low unemployment, low inflation and stable economic growth has positive impact on the domestic sector (the consumers and investors) and also the external sector, it is important for a successful economy to achieve these objectives. Body - Explain what it means to have low unemployment, low inflation and stable economic growth. - Explain the effects of achieving low unemployment, low inflation and stable economic growth on the domestic sector. - Explain how achieving the 3 internal goals of the economy will affect the external goals of the economy (BOP equilibrium or surplus and stability/confidence in the currency Explain how COP may be reduced => reducing the price of export => improving export performances Explain how reduction in COP and increasing confidence in the macroeconomic management => more FDI or capital inflow => improving BOP b) It is important for the answer to recognize the nature of the Spore economy and the main causes/factors which will help achieve all the macroeconomic objectives. In the development of the essay, the answer should show that FP can help to achieve some of its goals but it may also worsen others (conflicting objectives). The answer should also highlight that due to the nature of the Spore economy, FP by itself may not be adequate to all the goals. The answer should then go on to address how adopting a policy mix might be more effective for Spore. Introduction - Apply the explanation of the various macroeconomic objectives in 4a) to the case of Spore. - Answer should also showcase some awareness of the Spore economy (in particular, the nature/main cause of the macroeconomic problems) Inflation is largely imported inflation Growth is normally affected by performance of external DD and there is emphasis on sustainable growth

Unemployment is usually structural but can also be DD deficient in periods of regional/global recession BOP is usually affected by weakening X and inflow of capital (both FDI and hot money) - Define FP Body Thesis - Explain how expansionary FP (through reduction in taxation and increasing G with supply side policies elements) can help Spore achieve some of it macroeconomic objectives (increase actual and potential growth, reduce DD deficient unemployment, may reduce structural unemployment if the G is in education and skills training, capital acc may improve through FDI inflow) Anti-thesis - Explain how the nature of the Spore economy may reduce the effectiveness of FP i.e. small and open nature of the economy, heavy dependence on external DD, small k, mindset and resistance to changes in the workforce - Explain how (the same) expansionary FP may worsen some of it macroeconomic objectives (worsens dd pull inflation, current acc may worsen due to higher import expenditure). - There are other policies which may complement the use of FP to help Spore achieves its goals (eg. exchange rate policy, more supply-side measures) i.e. Use of expansionary FP to attract FDI and foreign talent and boost potential growth through developmental expenditure (SS-side policies) eg. R&D, infrastructure, skills training. Such efforts may also move the economy up to a higher level on the comparative advantage ladder and may continue to enjoy strong export performances. Combine the use of FP with the gradual appreciation of the Singdollar, we will be able to manage imported inflation and reduce the rate of increase in the prices of exports and hence promote non-inflationary growth. Conclusion Although FP does a fairly good job in encouraging both actual and potential growth, FP is not the best policy for Singapore. There is a need to complement FP with other policies such as exchange rate policy and supply-side policies to enhance the effectiveness in the use of FP to achieve the various macroeconomic goals for the economy.

Essay Qn (2008 GCE A Level) 2) Discuss the most appropriate policies that a government could adopt to encourage both actual and potential economic growth. [25] Approach: This question is on macroeconomic policies and only 1 out of the 4/5 macroeconomic objectives. The answer should focus on how each of the macroeconomic policy may or may not encourage economic growth (both actual and potential). The anti-thesis should focus on the limitations of the various policies given the nature of the different economies/countries and not on the conflicts with the other macroeconomic objectives. (Take note that this is not a conflicting objectives essay)

A generic or theoretical discussion will not be sufficient to address the phrase the most appropriate policies in the question. Although the question does not specify a context, the use of examples will better illustrate and enhance the quality of discussion (L3 and E2 marks involved). Introduction 1 Define and explain both actual and potential economic growth (may use AD-AS model or PPC) Explain how actual and potential economic growth may be achieved (increasing the components of AD for actual growth and quality and quantity of resources for potential growth) Body Thesis Explain how each of the various macroeconomic policies may encourage actual and potential growth. (Use examples to illustrate) Expansionary FP (through reducing direct taxation and increasing G) may increase C, I and G actual growth and possibly potential growth if G is developmental expenditure. [Examples: Chinas 4 trillion RMB fiscal stimulus package to combat the global recession. Singapores S$20.5 billion Resilience Package in 2009, with a supply-side focus, such as retraining and skills upgrading, such as SPUR] Expansionary MP (through increasing money supply or reducing i/r) may increase C, I: actual growth and also potential growth in the LR [Examples: Central Banks around the world cutting interest rates aggressively during the subprime crisis to stimulate the economy] Devaluation: X-M to improve, assuming Marshall-Lerner condition holds: actual growth [Examples: Singapore adopting a non-appreciating stance in 2009 to boost export competitiveness] Supply side policies (may be command-based or market-based) : increase quantity and quality of resources: potential growth [Examples: Infrastructure development, retraining programmes to increase productivity, creating a pro-business environment to attract more FDI, deregulation that allows more competition in sectors such as telecommunications and public transport, lowering taxes to encourage incentive to work etc] Trade policies: Signing of FTAs Anti-thesis While explaining how the various policies may encourage actual and potential growth, the answer should also address potential limitations of the various policies and also the constraints of the nature of the economy. (use specific limitations to evaluate the policies) Expansionary FP (crowding out if the government borrows to finance its spending, small k for countries with high saving and tax rates and heavy reliance on imports given its lack of natural

resources, time lags, small proportion of domestic sector, C and I being unresponsive to tax cuts given poor sentiments and hence higher precautionary savings etc) Expansionary MP (unresponsiveness of C and I to i/r changes especially during a recession [such as Japan in the 1990s and the USA after the sub-prime crisis , liquidity trap, inflationary concerns, small k etc) Devaluation (elasticity of dd for X and M, retaliatory devaluation by competitors, limited impact during a global recession where the purchasing power of major trading partners remain low, conflict with imported inflation and raising the cost of production of exports especially if the import content is high etc ) Supply-side (long gestation periods, resistance to changes, budget concerns etc) Synthesis / Conclusion Different economies due to their different nature of the economy and constraints will require a different policy mix to encourage both actual and potential growth. This would enable the country to enjoy increasing GDP [and hence material welfare] in the long-run while keeping inflation low, that is, sustainable growth. Good answers would have discussed some of these constraints and limitations in the main body and may reiterate and reinforce the case they are making by focusing on at least 2 economies to round up the discussion. For example: Singapore uses Exchange rate [given its heavy reliance on trade for growth and imported necessities as a country with small domestic market and lack of natural resources] FP with supply-side elements [FP is ineffective as a demand-management tool as k is small. Hence, FP in Singapore focuses more on its supply-side effects] and not MP (i/r) [given its small economy and openness to capital flows as a financial centre, Singapore is a i/r taker, small domestic sector, small k, etc] In contrast, the USA uses MP, FP and supply-side policies but not ERP due to its impact on the capital acc (big proportion of domestic sector, independent i/r determination, relatively bigger k etc) 3) Discuss how the characteristics of being small and open have influenced the policy options of the Singapore government. [25] Approach: This question requires a discussion of the various policy options of the Singapore government in the context of a small and open economy. It will hence involve a good discussion on how each type of policy is affected by these characteristics in terms of: Its effectiveness and suitability and/or Its nature and implementation, that is, how the policy is used and what adjustments needed to be made under different conditions Introduction

Singapore is a small country with a population of 5 million and land area of 710 sq km. The implications of being small are: Small domestic market hence dependent on external demand as the major engine of growth Lack of natural resources hence dependent on imports for necessities such as energy, food and factors of production Limited domestic capital hence dependent on FDI to drive growth Price-taker in international markets hence domestic economy affected by changes in external prices and interest rates Due to its smallness, Singapore has adopted an open approach to drive its development. The implications of being open: High reliance on trade: X+M is more than 300% of GDP, while net exports account for approximately 30% of GDP Capital mobility affects domestic money supply and exchange rate Vulnerability to external shocks such as global recessions, spikes in oil and commodity prices etc The characteristics of being small and open significantly influence Singapores policy options to achieve its 4 macroeconomic aims. Body Monetary Policy Singapore is an i/r taker in the world financial market and has little control over domestic i/r. Due to Singapores high dependence on trade, MAS has chosen ex/r pocliy over control of domestic Ms and i/r. For example, if Spores i/r is above world i/r hot money inflow due to higher returns on S$ increased liquidity in Spores financial markets Ms increases i/r falls on par with world i/r again

Exchange Rate Policy Since Singapore is highly dependent on imports for FOPs, food, fuels, etc, as well as export as the major engine of growth, it is more important for the government to control the ex/r. Explain how ex/r policy helps achieve macroeconomic aims. For example, strong currency to make imports cheaper in S$. This will help achieve price stability by keeping imported inflation, and hence cost of production/living low. Assuming Marshall-Lerner holds, ex/r appreciation also keeps demand pull inflation in check by lowering [X-M] While stronger currency may compromise export competitiveness, this negative impact on AD [and hence growth and unemployment] is mitigated partially by the fall in prices of imported inputs [and hence COP]. However, ex/r has to be flexible: during a global recession, MAS may need to allow for depreciation to help boost exports and stimulate AD. The benefits of depreciation must

be weighed against the possible increase in price level due to higher prices of imports as the economic situation improves Fiscal Policy Fiscal policy is still the main demand-management policy in Singapore, especially in times of recession. Examples include Resilience Package in 2009 Explain how expansionary fiscal policy works with AD-AS diagram When the economy is growing at a healthy rate, the government adopts a prudent fiscal policy to build up reserves. This ensures that the government has adequate reserves to ride out any economic crisis without having to incur a high public debt and risk crowding out investment and consumption. Effectiveness of fiscal policy is limited by the characteristics of small and open: for example, high dependence in imports and hence small multiplier Hence, fiscal policy in Spore tends to focus on supply-side. e.g improving infrastructure, maintaining competitive tax regime to attract FDI, retraining of workers etc. Supply-side policies In view of the limited effectiveness of demand-management policies, supply-side policies play an important role to bring about long-term sustainable economic growth as well as maintaining international competitiveness Market-oriented policies such as promoting competition, privatization, deregulation, maintaining wage flexibility through good tripartite relations help to improve market efficiency and reduce structural rigidies Interventionist policies such as promotion of R&D, retraining of workers and building public infrastructure help to increase productive capacity These will lead to potential growth, lower structural unemployment, downward pressure on cost-push inflation etc This in turn will 1) Improve export competitiveness as higher productivity lowers cost of production [and hence counter the rise in export prices due to stronger ex/r]. Higher levels of R&D and innovation also improves the quality of exports 2) Attract FDI as MNCs are drawn to Singapore because of her productive workforce, good infrastructure, tax incentives, etc. As Singapore has limited capital stock, it is dependent on FDI for expertise transfer, capital accumulation, development of new comparative advantages, etc Other policies E.g FTAs to expand markets for Spore exports. For firms, this would mean access to much larger markets beyond the small domestic market of 5 million, and enjoy more scope of EOS, etc Conclusion Being small and open, Singapore is a price taker and susceptible to change sin worlds demand and supply conditions. Consequently, this has restricted some of Singapores policy options as well as made some policies more significant compared to other countries. The openness of the economy to capital flows and high reliance on imports have made conventional demand-management policies such as monetary and fiscal policies either inappropriate or less effective. As such, supply-side policies tend to play a

more important role in helping to achieve the various macroeconomic aims, especially in the long term, Nevertheless, the various policy options have their respective usefulness in different contexts, and a mix of policies that cater to the prevailing internal and external economic conditions may be the way to manage the Singapore economy.

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