Econs

Write down multiplier process

Effects of i/r, e/r , FP , MP, ss-side policies,

Which policies better to decrease BOP/Un/Inflation/ increase economic growth

Long term and short term effects of policies→ which one better

Evaluation

What to look out for in qn→ what concepts to apply (don’t use multiplier if talking about recession cos multiplier reduces severity of recession)

Actual growth and potential growth

Definitions

Monetary Policy → AD management tool to influence level of economic activities to achieve macro- economics objectives.

Exchange rate → measures the price of a domestic currency in terms of another foreign currency.

Interest rate → price of money or cost of borrowing in percentage terms.

QE → buying of bonds by the central bank, thus increasing supply of LF and lowering the interest rates

GDP at 2000 prices → total value of final g&s produced within the country in a given period of time at 2000 prices, price in 2000 used as the base year, effects of inflation have been eliminated from the GDP figures

Depreciation/ Appreciation → used when a country on a floating/ managed float system reduces/increases value of its currency

Devaluation/ Revaluation → used when a country on a fixed exchange rate system reduces/ increases value of its currency

Economic growth→ refers to actual and potential growth achieved by increase in AD/AS

Actual growth→ increase in national o/p actually produced for a given time period, commonly measured by % increase in real GDP

Potential growth→ increase in productive capacity of economy for given period of time.

Inflation

• Low inflation is the prerequisite to the attainment of Sg’s other macro goals in the LR → improves BOP, Un, econ growth
• Low inflation relative to other countries→ improves export competitiveness→ BOT, BOP improves
• Size of multiplier in Sg small→ further dampened by inflationary pressures → low inflation help decrease the dampening effect → will cause AD↑ → result in actual growth
• Low inflation→ attract FDI as foreign investors able to easily predict the future returns on investment projects→ ↑ potential of actual growth

Potential Growth

• Increase in current consumption is at the expense of savings→as savings fall→ fall in investments due to less funds for investment and rising interest rates→ fall in productive capacity→fall in potential growth→economic growth will be hindered in the long run.

Evaluation

• The extent of growth depends on the extent of increase in C, the size of k and the state of the  economy
• As to whether growth can be sustained depends on the impact on productive capacity.

• There are many determinants of consumption in an economy.
• The relative importance of the factors differs from country to country and may also depend on  the prevailing state of the economy.
• Extent to which other countries (UK & US) will increase dd depends on success of QE in stimulating economy→ most impt factor is hh and business sentiments→ they will determine extent of ↑C & I → which will in turn affect AD of Sg (exports)
• Extent to which other countries (UK & US) will ↑ FDI is low→ QE needed to ease recession, firms already doing badly cos of recession→ wont want to spend → unless MNC which have significant presence in growing Chinese and East Asia markets
• Structural reforms are also required in both countries to improve the competitiveness of the economies. QE cannot be not a long term solution to US and UK economic woes.
• Sg needs to manage problems(dd pull, financial and property asset bubbles), which could arise from QE in UK & US → has to set in place policies to deal with these possible problems→ modest and gradual app. Of S$ to moderate inflation | cooling measures in property market to curb asset bubble from forming
• Stronger S$ → lower inflation → but negative impact on service industry (tourism) which has little import content
• SS side too LT , if need immediate action use FP/MP → but debts may worsen
• Should pursue both LT and ST solutions to solve the problem

What to look out for in qn

• Many students also did not explain HOW the size of the multiplier will change effect the economic growth rate. They are expected to show that with a smaller k, every round of induced consumption is lower than with a larger k, thus affecting the rate of growth.
• When a question is specifically on economic growth (17 marks), it is important that students gives a detailed explanation of the k-effect, the k-principle and the k-process (when it starts, how it continues, and when it stops), since economic growth is about a rise in real national income.
• Need examples, use country names don’t just say country A/B
• Lack of factors explained (must explain 3 factors to gain Level 3 marks)→ in reference to factors affecting consumption

Consumption

Autonomous

• Interest rate→ fall in i/r →cost of borrowing ↓→ hh borrow more big ticket items cos total cost of consuming ↓→ consumption ↑
• Expectation of future income→ more willing to spend now→ believe have the means to finance current expenditure→ consumption ↑
• Government policy→ raise income tax rates→ disposable income ↓→hh have less purchasing power → consumption ↓

Induced