YIJC 2024 JC2 H2 Prelim Essay Q5 Suggested Answer

5 In 2022, Singapore's economy was impacted by global events such as the ongoing supply chain disruptions caused by the Russia -Ukraine war, which led to increased energy prices and inflation. Additionally, the tightening of global monetary policies by major economies, including the Federal Reserve's interest rate hikes, put further pressure on Singapore’s export-driven economy. (a) Explain how the above events led to adverse consequences on the Singapore’s economy. [10] (b) Discuss the policies implemented by the Singapore government to mitigate the adverse consequences brought by the above global events. [15] Suggested answer for (a) R1: Explain the adverse impact of supply chain disruptions caused by the Russia-Ukraine war on the Singapore’s economy. The supply chain disruptions arising from the Russia -Ukraine war led to a rise in general price level (GPL) in Singapore. The two countries are major suppliers of key commodities such as oil and gas. The war disrupted their supply, causing prices of several commodities such as oil and gas to spike. Given that Singapore lacks natural resources and imports these commodities, which are key factor inputs in many production processes in the country, the rise in prices of the commodities would increase unit cost of production. Higher energy prices also drove up electricity and transport costs for firms. Firms typically respond to the rising cost by passing on part of the increase to consumers in the form of higher prices and by cutting back on production. This translates to a fall in short run aggregate supply (AS) causing the AS curve to shift from AS o to AS1 as illustrated in Figure 1. This results in a shortage that causes a rise in GPL from Po to P1. If this increase is sustained, cost-push inflation occurs. The fall in AS also leads to a fall in real national income (RNY) from Y0 to Y1. As firms cut back on output, they also reduce the amount of labour hired and unemployment increases. GPL RNY P0 P1 AD AS0 QF Y0 Y1 O AS1 Figure 1: Fall in AS

R2: Explain the adverse impact of tightening of global monetary policies by major economies on the Singapore’s economy. The tightening of global monetary policies by major economies, including the Federal Reserve's interest rate hikes will have contractionary effects on Singapore ’s economy. The rise in interest rate in major economies such as US increases borrowing costs which will reduce the expected profitability of investments, so investment expenditure (I) will fall. Consumption expenditure (C) also falls due to higher borrowing costs as the loan repayment will be costlier for the consumers. T