EJC_H2_ECONS_Essay6_Suggested_ans_and_mark_scheme

1 EQ6 The Singapore economy is likely to see mode st growth over the coming quarters, with GDP projected to expand by 1% to 3% for 2016. This is coupled with growing income inequality. With US adopting protectionism and its growth slipping further, global trade activities will continue to dampen. Discuss the relative effectiveness of an exchange rate policy and supply-side policies in addressing the above challenges. [25] Intro: From the preamble above, Singapore is set to face a series of challenges such as slow growth, worsening of its balance of payments as well as non-inclusive growth. This is due to the dampening of global trade activities caused by the US’ adoption of protectionism and fall in its growth. Therefore, the Singapore government will have to implement a string of policies such as exchange rate and supply-side policies to tackle the problem. Body: P1: Establishing the context and hence key issues facing Singapore i.e. The adoption of protectionism by US and its falling growth will pose some challenges to Singapore’s economy. The fall in growth rates in the US will result in a fall in demand for goods and services exported by its trading partners such as Singapore. With gr owth slipping further, consumers in the US will be less likely to purchase as many goods and services from Singapore due to a fall in consumers’ confidence. This fall in demand for Singapore’s exports will result in a fall in both its price and quantity causing total revenue from exports to fall. In order to protect its domestic industries and prevent its growth from slipping further, the US government has adopted protectionist measures such as that of a tariff on foreign goods. Such a measure will lead to a rise in pr ice in Singapore’s exports into the US causi ng a more than proportionate fall in quantity demanded assuming the price elasticity of demand for Singapore’s exports is price elastic due to the availability of substitutes in the US. This will again lead to a fall in Singapore’s export revenue. This fall in export revenue will cause aggregate demand (AD) to fall. This fall in AD (from AD1 to AD2) will counteract the rise in AD (from ADo to AD1) cause by the ot her components such as domestic consumption, government expenditure and investment expenditure. This results in slow growth from Yo to Y2 instead of Yo to Y1.

2 The initial fall in injection (X) will lead to a corresponding initial decrease in national income. Consequently, this fall in incomes will lead to a fall in induced cons umption and a fall in withdrawals (in the form of savings, taxes and import expenditure). The amount of fall in induced consumption is determined by the value of marginal propensity to consume. The higher the value of MPC, the greater is the fall in induced consumption and hence the larger is the fall in national income. The multiplier process continues until the initial fall in injections