2013_YJC_H1_Econs_Q4 Answer

4 Singapore is facing significant challenges in the new era of slow growth, quantitative easing and rock-bottom interest rates in the US and UK that will have knock-on effects on the general price level. a) Explain the effects of “quantitative easing and rock-bottom interest rates in the US and UK” on the general price level in Singapore. [10] b) Discuss the effectiveness of exchange-rate centred monetary policy in Singapore to overcome the twin challenges of slow growth and inflation. [15] Part (a) Suggested outline Introduction • Introduce Singapore as a small and open economy which allows capital flows into and out of the country • Because of this openness, any changes in monetary policy decisions abroad will have an impact on Singapore’s economy. • Introduce US and UK’s monetary policy decisions in the context of slow growth performance Development Explain how quantitative easing in US and UK led to rising general price level in Singapore • Explain how rock-bottom interest rates and the increased liquidity abroad due to quantitative easing in the US and UK led to inflow of hot money into the Singapore’s property market, driving up property prices. • Explain that housing has a high weighting in the computation of CPI and hence led to asset inflation. • Explain how rising property prices led to increased consumption spending because of the wealth effect • Explain that the large inflow of hot money due also placed a downward pressure on domestic interest rates, causing a “property bubble”. • Explain how the increased consumption and investment spending resulted in demand-pull inflation using AD-AS analysis L3 A clear and well-explained answer of the effects of the policies on the general price level in Singapore, with an understanding that inflation has shifted from imported inflation to a domestic one. 8-10 L2 An undeveloped explanation of the effects of the policies on the general price level in Singapore An attempt is made at explaining the effects of the events on the general price level in Singapore 6-7 4-5 L1 Explanation of the causes of inflation in Singapore without reference to the context 1-3

Part (b) Suggested outline Introduction • Singapore uses an exchange-rate centred monetary policy which is adjusted according to the MAS’ assessments of the risks to inflation vs. growth • Exchange-rate policy alone cannot tackle the twin challenges of slow growth and inflation at the same time due to the conflict in macroeconomic goals, and also because it is a blunt tool in dealing with the main causes of inflation facing Singapore currently. Development • Explain that the use of exchange rate policy will lead to a conflict between economic growth and low inflation, making it ineffective in tackling the twin challenges of slow growth and inflation in Singapore. - Appreciation of the exchange rate lowers inflation but resul