5(a) Explain why exchange rates rather than interest rates are the preferred choice as the instrument

of monetary policy in Singapore. INTRO Macroeconomic goals Singapore aims to achieve: growth & low inflation exR: manipulation of value of SGD against other currencies in forex market i/r: instrument to increase AD through reducing i/r BODY Singapores situation: Small open economy Small domestic market = small consumer size Why Singapore doesnt use i/r as instrument of MP: Using fall in i/r to increase AD = limited effect on growth o Singapore has small population o Small multiplier o <insert multiplier para here> Fall in i/r increase AD increase GPL inflation, therefore cannot fulfill two goals by reducing i/r MEI is i/r-inelastic in Singapore o Alternate sources of funding = FDI o <draw MEI graph> Why Singapore uses exR as instrument of MP: Singapores nature o Need imports for 1) sustenance & 2) raw materials Lack of natural resources; not self-reliant o Ability to export Highly-skilled workforce Well-developed tertiary industries E.g. state industries like wafer chip manufacturing; pharmaceutical industry o Therefore Singapore exports manufactured products and imports food and raw materials Appreciating exR Px increase, Pm decrease / Qx decrease, Qm increase (X-M) decrease AD decreases (shifts left) GPL falls reduces inflation Appreciating exR keeps imported inflation low (imported goods like food and raw materials become cheaper) CoP falls AS decreases (shifts down) Therefore, exR policy targets both AD and AS (in terms of inflation) = more effective than i/r which only targets AD Despite appreciating exR to reduce inflation, this does not compromise growth because Singapore uses other tools to increase growth o Retraining of workers o Targeting wage rates (through manipulation of CPF) In addition, most of Singaporeans savings tied up in CPF appreciating exR would ensure real value of savings does not get eroded

CONCLUSION Because of import and export factors, Singapore uses gradual appreciation of exchange rate o To ward off imported inflation, which would result in cost-push inflation (especially cost of raw materials increases)

5(b) Discuss the likely impact on the Singapore economy of quantitative easing and low interest rates in the US and the UK. INTRO Explain quantitative easing o Injection of money into the economy through buying of financial assets increases money supply o Used when interest rates can go no lower (close to 0%) impact on Singapore economy = impact on 4 macrogoals QE and low i/r work hand in hand, therefore effects will be the same BODY Primary impact: o QE depreciation of USD and pound o low i/r decrease cost of borrowing increase C and I in US & UK Impact on Singapore: o [growth] increased money supply in US and UK greater affluence increased D for Singapore goods Xsg increases (X-M) increases AD increases real NY growth o [unemployment] (carried on from growth) real NY increased D for L as D for L is derived from D for g&s o [inflation] (carried on from growth) AD increases GPL increases inflation o [BoP] low i/r in UK & US hot money inflow into Singapore surplus in FA BoP surplus o however contradictions here we go o [BoP] hot money inflow into Singapore increase in D for SGD appreciation of exR if ML condition holds (PEDx + PEDm > 1), BoT will worsen BoP deficit o [inflation] appreciation of exR Px increase / Qx decrease decreased D for Singapore goods fall in demand-pull inflation appreciation of exR Pm decrease CoP falls fall in cost-push inflation o [growth] decreased D for Singapore goods (X-M) decreases AD decreases real NY decreases reduced growth o now for evaluation o overall reduced growth b/c despite greater affluence in US & UK, they might not choose import g&s from Singapore due to higher prices caused by appreciation in exR o subsequent increase in unemployment o overall reduced inflation b/c (from above), AD does not increase much + fall in both demand-pull and cost-push inflation o overall BoT will worsen but BoP might not have deficit since Singapore has a history of BoP surplus and has other trading partners besides US & UK CONCLUSION Overall negative impact on Singapore economy with reduced growth, increased unemployment and possible worsening of BoT, though inflation is reduced