Macro Flashcards
What are injections?
Injections refer to any payment of income made to domestic firms that do not arise from domestic households but are additional spending generated by other sectors of the economy. Injections consist of investment expenditure, government expenditure, and export revenue.
What are withdrawals?
Withdrawals refer to any part of households’ income that is not spent on domestic firms, and is siphoned from the circular flow of income. The 3 forms of withdrawals are: savings, taxes, and import expenditure.
Explain the effect of an increase in interest rate on ER
As domestic interest rates increase, CP, the yields on holding the country’s assets rise relative to that of other countries. Both foreign and local speculators will increase their holdings of the country’s short term financial assets as they move their funds in search of assets with the highest expected rates of returns. Capital inflows increase, while capital outflows decrease. The simultaneous increase in demand for and decrease in supply of domestic currency will create a shortage for domestic currency in the forex market, resulting in currency appreciation
In your own words, explain why interest rate policies would be ineffective in sg (if we even used it in the first place) —> this is NOT the MP trilemma explanation
In countries where households and firms rely on their own sources of funds, changing interest rates would have little effect on consumption and investment. Eg, MNCs rely on their home offices for funds instead of loans in the host countries to finance their investment. Consumers also have ample amount of savings to draw on to finance spending. Hence, interest rate changes not increase C and I significantly given that spending by consumers and firms are not reliant on loans in the first place.
Explain crowding out effect as a limitation of expansionary fiscal policy, and its effects on the economy
Crowding out effect occurs when government spending causes the government’s budget balance to go into a deficit, and governments borrow to finance the budget deficit.
When govt borrow to finance budget deficit, this puts them directly in competition with the private sector for the limited pool of funds in the economy. DD for loanable funds increase, while supply of loanable funds remain constant, DRIVING UP INTEREST RATES
Negative effects of interest rate increase (WHEN YOU ARE TRYING TO RAISE AD THROUGH FP, THIS IS PRETTY COUNTERPRODUCTIVE ) increases cost of borrowing relative to eRORI, discouraging I
As interest rate increases relative to interest rates in other countries, foreign and coal speculators will increase holdings of country’s short term financial assets.
Attracts inflow of hot money, and decreases capital outflow, leading to a simultaneous increase in demand for country’s currency and decrease in supply. CP, this place upward pressure on ER, causing country to lose export price competitiveness. X fall, Cd also fall.
How does an increase in global commodity prices cause depreciation? MAKE THE LINK FROM TRADE TO CURRENCY VERY EXPLICIT
Many essential imports, such as rice, oil and wheat, are global commodities with PED value less than 1. The increase in global community prices will lead to a less than proportionate fall in quantity demand, leading to an overall increase in TEm. Citizens have to pay more for higher priced imports, selling away more domestic currency in exchange for foreign currency to facilitate these exchanges
How does fall in exports cause the country’s currency to depreciate?
To buy exports, foreigners usually need to acquire domestic currency. With lower demand for exports, there is less need for foreigners to purchase domestic currency, thus resulting in a fall in demand of domestic currency.
Explain time lag as a limitation of fiscal policy
It takes time to recognise that there exists a macroeconomic problem because it takes months to collect and analyse data. Once the policy has been implemented, it also takes time to work through all steps of the multiplier process, and for the changes to be transmitted to the product and factor markets, before the full effect of the policy can be felt.
Due to this time lag, the problem will persist and may even deepen as the policy works its way through the economy. By the time the full effect of the policy kicks in, it might not be sufficient to correct the problem entirely.
Explain sg’s small k size as a limitation of demand management policies
Singapore has high withdrawal rates due to its lack of natural resources making it highly reliant on imports and a compulsory saving of workers’ monthly salary through the Central Provident Fund. Given Singapore’s high MPM and high MPS, the size of its multiplier is very small. This means that for every additional dollar of income earned, a large proportion is leaked out of the circular flow leaving only a small share that is channeled back into the circular flow to create income for the next group. This weakens the multiplier effect and reduces the effectiveness of the policy.
