EMPOWERING STUDENTS TO REACH THEIR PEAK POTENTIAL

J2 Macroeconomics Set 7:
Macroeconomic policies
(Application)

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 Macroeconomic Policies
In the context of Singapore
1) Fiscal Policy
 An expansionary fiscal policy is typically used only during worldwide
recession.
 The government practises fiscal prudence, which means spending within the
government means and maintaining a nest egg of reserves for contingencies.
 Fiscal policy is ineffective in Singapore due to our small multiplier size (due
to high marginal propensity to import and save) and reliance on international
trade rather than domestic trade.
 This means that injections into the economy via government spending or
reducing taxes to induce consumption and investment will have a weak effect
on the change in real national income (compared to a country with a large
multiplier size and that is reliant on domestic trade).
 EG1: During the recession in 2009, Singapore government implemented the
resilience package totalling $20.5 billion to help stimulate the economy. This
was funded by tapping on past reserves built from past budget surpluses.
 This resilience package includes expanding public sector hiring and bringing
forward public infrastructure projects, creating more jobs for the economy
and reducing cyclical unemployment. The jobs credit scheme was introduced
by then, a short-term policy, for the government to subsidise labour costs and
retrenchment.
 EG2: In response to the economic challenges posed by the COVID19
pandemic, the Singapore government implemented a landmark $48 Billion
package to save jobs, support workers, and assist businesses that have been
directly affected.
 The measures included larger wage support and scrapping of property tax for
those harder-hit sectors, deferment of corporate income tax payments for
three months, and $20 billion to be set aside as loan capital and enhancements
to various financing schemes for firms.
 Worst-hit sectors will also be given more relief – a S$350 million enhanced
aviation support package, S$90 million for the tourism industry when it
recovers, a further S$95 million for taxi and private hire car drivers and S$55
million for arts and culture.
 Therefore, only in dire situations, such as economic recessions, are
expansionary fiscal policies used by the Singapore government to stimulate
the economy.

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2) Exchange Rate policy
 While the traditional exchange policy relies on currency depreciation in order
to stimulate growth through a rise in net exports, due to Singapore’s resource
endowment and its heavy reliance on imports in manufacturing exports,
Singapore takes a modest and gradual appreciation stance in order to
mitigate the impacts of imported inflation.
 Singapore operates on a managed float system for its exchange rate (vs
floating and fixed exchange rate for other countries). The sing dollar is
managed within a band against a trade-weighted basket of currencies of
Singapore major trading partners.*
 This results in a lower cost of production of goods, which can result in an
increase in export competitiveness, curbing the effects of the good being
dearer in foreign currency due to the appreciation of the currency.
 EG: MAS’s tighter monetary policy stance between 2004-2008 helped to
cushion the effects of higher global oil prices by lowering the price of
imports in local currency.
 EXCEPTION TO MODEST AND GRADUAL APPRECIATION STANCE:
However, during times of severe worldwide recessions, the central bank may
maintain a zero-appreciation stance or even depreciate the exchange rate to
boost net exports. This stems from the fact that imports are cheaper due the
fall in the general price level of trade partners due to their own recession
leading to falling price levels when AD falls.
 EG: In 2009, the MAS allowed a depreciation of 2% in light of the US
financial crisis in order to prop up external demand. However, there is still a
limit in which Singapore can rely on a weak currency to stimulate Aggregate
Demand. Singapore would typically focus on supply-side measures in
preparation for a global recovery due to its heavy reliance on trade.

*Note: To deter potential speculation, the Monetary Authority of Singapore

(MAS) does not disclose which currencies are included in its basket of
currencies or the specific trading band (upper/lower limit).

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3) Supply Side policy
 Both market-orientated or interventionist approach, but prefers market-
orientated approach during periods of economic growth and interventionist
approach in times of economic recession.
 Critical in ensuring long term non-inflationary sustained growth with low
unemployment by increasing productive capacity.
 Supply side policy must have examples in your exams!
 EG1: (Education & Training) Singapore government has provided a series of
training schemes (Skills programs for upgrading and resilience/ Continuing
education and training Masterplan) to develop human capital in Singapore.
The Special employment credit was also introduced in 2011 to provide
employers with monetary support to hire older workers. Extended maternity
and childcare leave are other policies implemented to suit working mothers
and make it easier for them to reintegrate into the workforce.
 EG2: (Education & Training) Singapore has a SkillsFuture Council which is
driving a national effort to develop skills for the future, and to ensure an
integrated system of learning for all Singaporeans. As part of the policies
implemented by this council, learning credits are provided for Singaporeans
aged above 25 to pay for courses for work skills-related courses to increase
productivity.
 EG3: (Quantity of resources) Policies to increase resource availability such as
land reclamation, investment in capital goods and continued efforts to
improve infrastructure in the country are important. For example, the
reclaiming for land led to the building of Jurong Industrial Island as well as
large parts of downtown Marina bay that hosts the Marina Bay Financial
Centre.
 EG4: (R&D) Singapore is committed to efforts to boost R&D and has set up
a Research, Innovation and Enterprise council to bring together the public
and private sectors to spearhead research and innovation strategies. Singapore
has also developed multiple science parks (Singapore Science Parks) to house
R&D and innovation efforts conducted by MNCs, local companies and
national institutions.
 EG5: (Tax) Singapore seeks to attract foreign investments and labour through
adopting free market policies that will increase incentive to work and relocate
to Singapore. Priding itself as a business-friendly climate, the corporate tax is
maintained at a competitive level of 17%. This also encourages greater
productivity amongst workers, improving the quality of labour in Singapore.

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 Furthermore, with the removal of restrictive rules of FDI, Singapore has
become an attractive destination for both investments and labour.
 EG6 (Reduce impact of imported inflation): Singapore has set aside funding
of $30 million to develop alternative energy to reduce its dependency on
imported oil. In addition, the NEA has introduced mandatory energy
management requirements for large energy users to improve Singapore’s
energy efficiency. Another example would be NEWater, a water purification
centre that converts polluted water into drinkable water in order to reduce
Singapore’s reliance on other countries for resources.
 EG7 (Building infrastructure) (Fiscal policy with SS effect): In the wake of
the 1997 Asian Financial crisis, the government devoted funds into the
construction of MRT lines. This helped boost actual growth and reduce
cyclical UN in the short run while raising potential growth.

4) Interest Rate policy

 Most countries, including our major trading partners China and USA, adopt
an interest rate policy where the central banks raise or cuts interest rates to
Stimulates growth by triggering consumption and investment.
 Singapore government uses an overt interest rate policy. Singapore is the
only economy in the world to utilize an exchange-rate focused monetary
policy.
 The Monetary Authority of Singapore (MAS) has given up control of
domestic interest rates. Instead, Singapore ties its interest rate to trade
partners in particular the USA. (whatever interest rate US sets, Singapore
follows)
 This is because excessive inflow of hot money results in an appreciation of
the currency, which causes export competitiveness to fall drastically due to
higher prices.
 Meanwhile, an excessive outflow of hot money results in a depreciation of
the currency, which causes imported inflation.
 Furthermore, wide fluctuations in the exchange rate that can destabilise
Singapore trading relationships. Investors will also be deterred from investing
in Singapore due to the unpredictability of the value of the Singapore dollar.
 By pegging our currency to US, our major trade partner, these monetary
flows will be significantly reduced, and this prevents the problems associated
with hot money.

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7 Different perspective points to analyse policies (BENTRUM):
1. Budget (Fiscal & SSP which requires budget vs monetary which doesn’t)
2. Expectations (Fiscal/SSP which is direct or monetary which is indirect)
3. Nature of the Economy (size, openness and level of development)
4. Time Period: Short term / Long term
5. Root cause of problem
6. Underlying state of Economy
7. Macroeconomic trade-offs

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1. Budget**
 Healthy Budget Position: Able to use fiscal policy (Government spending)
and Supply side policies.
 Weak Budget Position: Unable to use fiscal policy (Government spending),
must turn to fiscal policy (Taxes), interest rate policy or market-based supply
side policies such as increasing government spending.

2. Expectations **
 Strong expectations: Increasing Interest rate/tax rates ineffective, require
more direct measures such as lowering government spending.
 Poor expectations: Lowering interest rate/tax rates ineffective, require more
direct measures such as increasing government spending.

3. Nature of the Economy***

 Large and less open economies: bigger domestic economy would result in
fiscal and interest rate policies being more effective due to heavily reliance
on domestic trade.
 Small and open economies: smaller domestic economy would result in
exchange rate policies and trade policies being more effective due to low
reliance on domestic trade and higher reliance on international trade.
 Developing economies: weak, underdeveloped domestic sectors, resulting in
heavily reliance on trade and foreign direct investments, hence exchange rate
or trade policies are more effective.

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4. Time
 Short run policies: Fiscal policy, interest rate policy and exchange rate policy.
 Long Run policies: Supply side policies and free trade agreements.
 Long Run policies takes time into fruition and should be complimented with
short term policies.
 For example, reducing AD in the short run, while waiting for the increase in
potential capacity through a supply side policy, in order to tackle inflation.

5. Root cause of the problem

 The appropriate policy to use depends on the root cause of the problem.
 A country facing multiple problems should use multiple policies to solve
each policy since one policy is unable to solve different types of the same
problem.
 For example, demand-management policies can solve demand-deficient
unemployment but cannot tackle structural or frictional unemployment.
Education or job fairs respectively should be used to combat structural and
frictional unemployment.

6. Underlying state of the economy (used with other EV points)

 Argument is similar to Expectations (direct policies more effective)
 Supply Side policies are not appropriate if the state of economy is at the level
of full employment as it will lead to short-term demand pull inflation.

7. Macroeconomic Trade-offs
 Policies need to be used in tandem to compliment each other due to
macroeconomic trade-offs.
 Since policies meant to solve one macroeconomic problem can lead to
another macroeconomic problem occurring, multiple policies should be used
such that the country can achieve all its macroeconomic aims.
 For example, a fiscal policy that leads to economic growth and
unemployment may lead to inflation, so complimenting it with a supply side
policy will help make growth sustained without causing inflation.
 Another example, an exchange rate appreciate may combat cost-push
inflation, but it might also lead to export competitiveness falling. A country
can complement it with free trade agreements to spur trade or supply side
policies to improve the quality of exports.

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Past Year questions:

2019/4b In 2017, the annual rate of inflation in Singapore was significantly

lower than the average rate in Southeast Asia.
Assess whether policies designed to prevent a large and continuing
rise in inflation in Singapore are the most appropriate policies for all
economies (15)

2018/4 In April 2016, Singapore’s finance minister Mr Hen Swee Keat,

announced that in the fiscal year 2016, total government expenditure
is expected to be S$5.0 billion (7.3%) higher than the previous year.

Assess whether an increase in government expenditure, such as that

announced in the 2016 budget, is likely to have a significant impact
in Singapore’s economic performance. (25)

2018/5a It was suggested by economists early in 2017 that world interest

rates were likely to rise in the future.
Explain why Singapore chooses exchange rates rather than interest
rates as its main tool of monetary policy. (10)

2017/4 : High rates of unemployment remain a major issue in many

economies of the world. An understanding of various causes of
unemployment is needed in order for a government to decide on the
economic policies that would help its economies achieve full
employment.
Discuss the various causes of unemployment and the economic
policies that would help to achieve full employment in today’s
globalized world. (25)

2017/5B Discuss whether policies aimed to increase the economic growth rate
might cause difficulties for Singapore’s economy. (15)

2016/4B Assess the relative effectiveness of the alternative macroeconomic

policies that the Singapore government could adopt to maintain a
low rate of unemployment (15)

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2015/4B Discuss whether exchange rate appreciation should remain the most
important policy instrument in controlling the rate of inflation in the
Singapore economy (15)

2015/5 During the recent world-wide recession many European countries

chose low interest rates as a monetary policy approach rather than
adopting demand-led policy stimulation. At the same time, with
most of these countries governments introducing large budget cuts in
government expenditure in order to reduce their budget deficits, a
fiscal contraction actually resulted.
Discuss which policy approach is appropriate for a country during
worldwide recession (25)

2014/6B Assess the alternative economic policies that the Singapore

government could adopt to maintain a sustained rate of economic
growth into the future (15)

2013/5B: Discuss alternative economic policies that the Singapore government

might consider adopting to alleviate these inflationary pressures (15)

2012/4 Governments generally face trade-offs between different

macroeconomic policy objectives. Discuss how far a government’s
macroeconomic policy decision when faced with these trade-offs are
affected by the extent to which the economy is open. (25)

2012/5a Explain why exchange rates rather than interest rates are the
preferred choice as the top instrument of monetary policy in
Singapore (10)

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