ACJC_H1_ECONS_P1_Qn4

4 (a) Explain the main causes of high inflation rates in Singapore. [10] (b) Discuss whether fiscal policy is the best policy for the Singapore government to achieve low and stable inflation rates. [15] a) Explain the main causes of high inflation rates in Singapore. [10] Suggested Approach Introduction  Define Inflation and identify the types of inflation – cost-push and demand-pull  Explain causes of cost -push and demand -pull inflation in Singapore which could be due to both domestic and external factors.  Context of Singapore: o Prone to demand -pull inflation as the economy is operating close to full employment. o As Singapore is a small open economy, external demand is likely to be larger than domestic demand, so demand-pull inflation is more likely to be externally driven rather than domestically driven. o With no natural resources and a limited land area, Singapore is highly reliant on imports of food and fuel, so cost push pressures are more likely to come with higher prices of such goods. o In general, given Singapore's high dependence on imports of food and fuel, Singapore is arguably more susceptible to cost -push inflation rather than demand-pull inflation Body (1) Demand-pull inflation Causes of demand-pull inflation Rising exports due to growing affluence of trading partners  In an export-oriented economy like Singapore, demand pull inflation is very likely due to strong external demand. This could be due to rising global growth or high global expectations and consumer confidence in the global market. High global growth  higher income and hence stronger purchasing power. Also boost business confidence boost export revenue and foreign investments into the country  drive up AD and hence GPL. AS P1 P2 P3 AD1 AD2 AD3 Q1 Q2 Real Output General price level

Government budget deficit (implies expansionary fiscal policy) i.e. the government’s increasing its spending and imposing tax cuts and subsidies, perhaps to stimulate the economy during economic slowdown or to achieve higher economic growth  Expansionary DD-management policies to increase growth will lead to inflation in the face of structu ral rigidities in the country . When direct taxes are reduced, consumers have more disposable income , causing consumer expenditure to increase. Lower corporate taxes will attract m ore investments, thus the increase in consumer expenditure and investment  AD rises, hence this will lead to higher general price levels. Thus, there is a rise in aggregate demand shown by a rightward shift of AD curve from AD 1 to AD 2. Assuming Singapore is operating near full employment, there will be a shortage of final goods and services which exerts upward pressure on GPL. GPL continues to rise until shortage is eliminated. The persistent increase in the general price level services from P 0 to P1 depicts demand-p