Economic Growth (DD-side Policies)

Question 1

What are the benefits of economic growth for households?

Answer 1

• Higher SOL if rise in Real GDP > rise in population
• Higher employment and wages since more goods and services are demanded

Question 2

What are the benefits of economic growth to firms?

Answer 2

• Higher profits
• Higher investment in R&D

Question 3

What is the benefit of economic growth to the government?

Answer 3

A lower government budget since tax revenue increases (less transfer payments)

Question 4

What are the disadvantages of economic growth?

Answer 4

• Environmental degradation
• Income inequality and non-inclusive growth
• Inflation
• Higher unemployment of low-skilled labour due to automation and AI

Question 5

Define sustained growth

Answer 5

Non-inflationary economic growth consisting of both actual and potential growth.

Question 6

Define economic recession

Answer 6

Negative economic growth rate in 2 consecutive quarters.

Question 7

What are the Expansionary demand-side Fiscal Policies in alleviating economic recession?

Answer 7

• Government expenditure on infrastructure (‘G’)
• Increase in transfer payments (‘C’)
• Reduction in direct/indirect tax rates (‘C’ and/or ‘I’, maybe ‘X’ due to reducing export tariffs)

Question 8

What are the limitations to expansionary dd-side FPs?

Answer 8

• Multiplier size (look at MPW or MPC)
• Government budget (worsening of deficit will cause countries to borrow or use fiscal reserves)
• Capital Flight may occur due to poor economic outlook caused by worsened deficit

Question 9

What are the 3 MPs to change money supply?

Answer 9

• Open Market Operations (buying/selling of government bonds to pump/take money into circulation)
• Varying bank rates (Central bank can choose to vary its bank rates to increase/decrease borrowing)
• Varying cash to reserve ratio (Central bank can choose to increase/decrease the ratio such that there is more money)

Question 10

Name the 3 diagrams in the Keynesian Transmission Mechanism

Answer 10

• i/r against qty of money diagram
• i/r against qty of investments diagram (Marginal Efficiency of Investments)
• AD/AS framework

Question 11

What are the limitations to MP?

Answer 11

• Interest elasticity of investments (Steepness of curve)
• Liquidity trap (households may choose to hold onto cash if interest rates approach zero due to poor economic sentiments)

Question 12

What is Quantitative Easing?

Answer 12

It is the buying of assets like government bonds such that money is pumped into circulation and liquidity increases. This results in the fall of interest rates (KTM) and decreases the cost of borrowing.

Question 13

What are the limitations of QE?

Answer 13

1. Inflation due to a rise in AD unmatched by the rise in AS
2. Despite lower interest rates, banks may still deem households and firms as high risk and are not willing to lend to them.
3. Similarly, households and firms may be unwilling to borrow from banks due to poor economic sentiments.

Question 14

How are appreciation and depreciation achieved?

Answer 14

Appreciation: Domestic currency is bought from the ER market.

Depreciation: Domestic currency is sold to the ER market.

Question 15

What is the benefit of appreciation?

Answer 15

Appreciation makes the price of imports cheaper, thereby reducing the cost of importing raw materials and overall decreases short-run aggregate supply due to a decreased cost of production.

Question 16

What is the disadvantage of appreciation?

Answer 16

It raises the cost of exports, and decreases the demand for exports as a result. This decreases export revenue.
Since the cost of imports falls, the demand for imports increases, causing import revenue to rise. This results in a fall in aggregate demand as net exports rise.

Question 16

What is the disadvantage of appreciation?

Answer 16

It raises the cost of exports, and decreases the demand for exports as a result. This decreases export revenue.
Since the cost of imports falls, the demand for imports increases, causing import revenue to rise. This results in a fall in aggregate demand.

Question 17

What are the benefits of depreciation?

Answer 17

• There is a rise in net exports (rise in export revenue, fall in import revenue), leading to a rise in aggregate demand.
• This rise in net exports causes an unplanned fall in inventory and there would be increased demand for labour in the export sector, causing a rise in employment and wages.

Question 18

What are the limitations of the ER policy

Answer 18

1. Size of multiplier.
2. Rising costs of raw materials, assuming the |PED| of imports > 1 (for depreciation only).

Question 19

How is IPP used in Singapore’s context?

Answer 19

In Singapore, employees would contribute 20% of their gross income to CPF.

The government can seek to reduce this % contribution to increase disposable income and purchasing power, leading to a rise in induced consumption.

Question 20

Limitations of IPP

Answer 20

• Size of multiplier (Look at MPS and MPC).
• Unintended future consequences due to reduced CPF contributions.
• Poor economic sentiments may translate to a less than proportionate increase in borrowing despite higher disposable income and ability to do so.