2011 Mr Lee

Q1 (b) Discuss whether fiscal policy is the most effective way for Singapore to sustain a
successful economy (13)
Theoretical Frameworks: AD/AS
Sustain economy: AD with AS
(positive real NY growth with low inflation)

Most effective? => requires alternative policies and needs to compare
Demand-side FP => G => AD => create N => via k real NY
(Evaluations: small k, crowding out etc, discuss w.r.t. Singapore)
Supply-side FP:
Cutting the lower and basic rates of tax to open up the gap between earnings in and
out of work and ensure people have an incentive to work (Evaluation: may not work
for lower end workers as they are already not paying much tax, should focus on
training/retraining to increase productivity)
Increasing the level of personal allowances for the same reason
Reducing the top rate of tax to encourage enterprise, risk-taking and the incentive to
work hard (Evaluation: Investment should not be seen solely in terms of the purchase
of new machines. Changes to the tax system and specific areas of government spending
might also be used to stimulate investment in technology, innovation, the skills of the
labour force and social infrastructure).
Highlight the facts that FP should be in the form of infrastructure development for
expanding the economy LT capacity (shift AS)

Other challenges Singapore faced for LT sustainable growth:
1. Imported inflation: exchange rate policy
2. Real wage faster than productivity : foreign workers and training/retraining
domestic workers
3. Increasing competition: restructure the economy to high tech/high end value added
industries, R&D
4. Increasing protectionism measures: adopt free trade policies, signing FTAs and join
regional free trade areas
Judgment: FP crucial to Singapores LT sustainability, however needs other policies to
ensure a sustain successful economy.
2011 Mr Lee

Q5 Discuss how the characteristics of being small and open has influenced the policy
options of the Singapore government. (25)

Small and open:
Domestic goods/services market
Labour market
Financial marker (esp ST fund)

Limitations and impacts on choice of policies:

FP: small k

MP: inability to control i/r

Trade: reliance on X and M

Exchange rate: imported inflation

Foreign workers policy: shortage of labour and high domestic labour cost


2011 Mr Lee

2009 A Level

4 (b)Assess whether a change in the external value of its currency is more likely to have a
larger impact on Singapore or the USA. (15)

Key focuses:

Exchange rate => economy (within the AD/AS)
Compare the impacts on Singapore (small/open) Vs USA (BIG/close)

Analysis:

Impacts on BOT:

Exchange rate => Px and Pm => (X-M), impacts depends on PEDx and PEDm

For Singapore PEDm < 1 (no substitutes, necessities) => thus if S$ depreciate, M will
, PED <1 (high value add/quality) => thus if S$ depreciate, X may decrease; the net
(X-M) will , depends on ML; as for USA, PEDx and PEDm >1, thus depreciation of
exchange rate will improve the BOT position;

Impacts on economy (N, NY):

(X-M) will have greater impact on Singapore domestic economy because of the
higher % to GDP as compared to USA;

Small multiplier in Singapore, thus limit the multiplier effect on real NY;

Impacts on GPL:

Singapore will also be subjected to higher imported inflation as we are highly
dependant on imports and PEDm < 1;

Judgments:

Small and open will be affected more;

Depends on governments reacting policies;


2011 Mr Lee

Impacts of exchange changes on countrys BOT

in exchange rate Impacts on export
earnings (X)
Impacts on import
expenditure (M)
Impacts on BOT
(X-M)

Currency depreciate




Px relatively
cheaper

Qx will increase

X = Px Qx will
increase if PEDx >1


X = PxQx



Pm more expensive


Qm will fall

M = Pm Qm will fall
if PEDm >1


M = PmQm

(X-M) will increase if
PEDx >1 and
PEDm>1, or

ML condition holds
(PEDx +PEDm>1)



(X-M)= PxQx - PmQm

Currency appreciate




Px more expensive


Qx will fall

X = Px Qx will fall if
PEDx >1


X = PxQx



Pm cheaper


Qm will increase

M = Pm Qm will
increase if PEDm >1


M = PmQm

(X-M) will fall if
PEDx >1 and
PEDm>1, or

ML condition do not
hold
(PEDx +PEDm<1)


(X-M)= PxQx - PmQm


Q: Explain how a change in exchange rate will affect the balance of trade position of
an economy. (8)



2011 Mr Lee

Impacts of exchange changes on countrys BOP

in exchange rate Impacts on BOT
(X-M)
Impacts on capital
account
Impacts on BOP

Currency depreciate




(X-M) will increase if
PEDx >1 and
PEDm>1, or

ML condition holds
(PEDx +PEDm>1)


(X-M)= PxQx PmQm


ST capital outflow

ST capital account
worse off

BOT improve
+
K account worse off

BOP ???

Currency appreciate




(X-M) will fall if
PEDx >1 and
PEDm>1, or

ML condition do not
hold
(PEDx +PEDm<1)


(X-M)= PxQx - PmQm


ST capital inflow

ST capital account
improve

BOT worse off
+
K account improve

BOP ???

Q: Explain how a change in exchange rate will affect the balance of payment position
of an economy. (10)


2011 Mr Lee

Impacts of exchange changes on economy

in exchange rate Via BOT
(X-M)
Impacts on capital
account
Net impacts

Currency depreciate




(X-M) will increase if
PEDx >1 and
PEDm>1, or

ML condition holds
(PEDx +PEDm>1


AD economy
+ve (unless
overheating)

Imported inflation




ST capital outflow
availability of fund
money supply
i/r I, C
AD





Currency appreciate




(X-M) will fall if
PEDx >1 and
PEDm>1, or

ML condition do not
hold
(PEDx +PEDm<1)

AD economy
-ve (unless
overheating)

Imported inflation



ST capital inflow
availability of fund
money supply
i/r I, C
AD






Q: Explain how a change in exchange rate will affect an economy. (10)


2011 Mr Lee

Impacts of exchange rate changes on Singapore economy

S$ appreciates

BOT should improve as ML might not hold, especially in the SR
ST capital inflow => confidence in financial sector => i/r lower => expanding
domestic economy
Imported inflation lower => GPL fall, COP will fall thus improving export
competiveness

However, if S$ appreciate too fast, our export competitiveness (in terms of price)
may be affected negatively, especially for exports which have relatively lesser
import contents (such as service industries)

As long as Singapore is facing imported inflationary pressure, we should keep a
strong and gradual appreciating currency, and to focus on other strategies to
enhance our export competitiveness (such as keeping wages low with foreign
workers or raising productivity via skills upgrading).