ACJC External Macro Tutorial Worksheet Section C Essay Answer

1 Question 4 Between 2012 and 2013 the number of Singapore dollars required to buy US dollars and Chinese Renminbi increase by 3.5% and 6.6% respectively, while the number of Singapore dollars required to buy Japanese Yen and Malaysian Ringgit fell by 15.2% and 3.5% respectively. Source: Monetary Authority of Singapore (a) Explain how an appreciation of a country’s currency might affect the current account of its balance of payments. [10] (b) Discuss the likely overall effects of the changes in the exchange rate in 2012-2013 on Singapore’s domestic economy. [15] (2016 A-Level Paper 2 Question 6) Question analysis: Command Explain how Concept • Currency appreciation • Current account of Balance of Payments Context Not given but students can use Singapore since it is given in the preamble Introduction: Unpack meaning of appreciation of currency (SGD) and current account of Balance of Payments • The exchange rate of a currency is its price (in the foreign exchange market) in terms of other currencies. • A country’s exchange rate is determined by the demand and supply conditions in the foreign exchange market. An appreciation of a country’s currency (say SGD) against the Japanese Yen (¥) or Malaysian ringgit (MYR) implies that less SGD is required to buy JPY¥100 or MYR100. • The current account in the balance of payments records a country’s international transactions of exports and imports of goods and services as well as primary and secondary income transfers. Requirement 1: Explain how currency appreciation may worsen the current account • Currency appreciation will cause the country’s exports to be more expensive in foreign currencies and imports to be cheaper in domestic currency. • Impact on exports: o With the increase in export prices in foreign currencies , quantity demanded will decrease. The extent of decrease in quantity demanded depends on PED. o The export revenue (price x quantity) in domestic currency will certainly fall since there is no change in export prices in domestic currency and quantity demanded has decreased because of the higher export prices in foreign currencies . The extent of decrease is greater when PED > 1. • Impact on imports: o Singapore context: With the decrease in import prices in domestic currency, quantity demanded increases. If the PED value of imports is less than 1 due to a lack of domestic substitutes, quantity demanded will increase less than proportionately,

2 ceteris paribus. This results in a decrease in import expenditure in domestic currency. (Note that students may also explained that PEDM > 1 in the context of other countries. The question does not require a specific context for part a . In such a context, import expenditure would fall, improving the current account.) o Since both export revenue and import expenditure have decreased in domestic currency, the impact on net export revenue (X -M) is uncertain and