Macroeconomics of Singapore

The report pertains to discussion of macroeconomic concepts of monetary policy, fiscal policy, inflation, unemployment and international trade. Two articles related to the said topics have been selected and discussed and analysed in the report and the suitable expansionary and contractionary polices have been discussed that can mitigate the problems like low economic growth and high inflation rate. The report, thus thoroughly discussed effects of monetary policy and fiscal policy on the economy of a country, especially on the economic components like economic growth, inflation and unemployment.

Running head: MACROECONOMICS OF SINGAPORE
Macroeconomics of Singapore
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Executive Summary
The report pertains to discussion of macroeconomic concepts of monetary policy, fiscal
policy, inflation, unemployment and international trade. Two articles related to the said topics
have been selected and discussed and analysed in the report and the suitable expansionary
and contractionary polices have been discussed that can mitigate the problems like low
economic growth and high inflation rate. The report, thus thoroughly discussed effects of
monetary policy and fiscal policy on the economy of a country, especially on the economic
components like economic growth, inflation and unemployment.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Article 1..................................................................................................................................3
Article 2..................................................................................................................................6
Conclusion..................................................................................................................................8
References..................................................................................................................................9

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Introduction
Theory of macroeconomics is very important to understand the economic shifts in an
economy. The economics growth, inflation, unemployment and trade are all the concepts of
macroeconomics. In this report, all the above concepts are discussed considering the
economic situation of Singapore. For the discussion, two articles have been selected that are
related to economic growth, international trade, unemployment and inflation. The report
discussed the role of monetary policy and fiscal policy in controlling the economy of the
country. It affects the economic growth and thereby influences the other economic
components of the country such as inflation and unemployment rate. One of the articles
discusses about the occurrence of low economic growth in Singapore and for that effects of
expansionary monetary and fiscal policy is applied and discussed. Monetary and fiscal
policies are also effective for altering inflation and unemployment rate. Therefore, at the end
of the report the concepts of the said macroeconomic concepts would be clear.
Discussion
Article 1
Source
https://www.channelnewsasia.com/news/business/singapore-economy-growth-gdp-q2-
lowest-in-decade-11713694
Summary and Analysis
The article reported that the economy of Singapore is growing at a very low rate and
is recorded as 0.1 per cent in the 2nd quarter, which is the lowest economic growth value of
the decade. The growth rate is even much lower than the forecast of 1.1 per cent made by the
economists. The annual Gross Domestic Product of Singapore has also been affected

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adversely. There was a contraction of 3.4 per cent in the GDP of the country. The effect of
trade war between China and the US has contributed adversely to the GDP of Singapore.
Both the public sector construction business and service industry grew at slower rate than the
previous years. Other industries have also grew at lower rate. Singapore relies on its export
industry for growth of its economy and any adversities in the export sector affects the
economy of the country negatively. Electronic sector in Singapore is large and exports a large
amount of its produce in global market. However, the trade war between China and the US
has affected the global trade demand and thus the Singapore also faces the harmful effect of
this trade adversities and the economy of the country would suffer from low growth rate (Liu
& Woo, 2018). Persistence low economic growth might push the economy of Singapore into
recession. The monetary policy that the Monetary Authority of Singapore implements to
control the slow economic growth is based on exchange rate (Chow, Lim & McNelis, 2014).
It does not rely on other monetary policies or fiscal policies that other countries use to control
the dwindling economics situation. However, in the following paragraph the effect of
conventional monetary policy and fiscal policy is discussed that are used to improve the
economy.
Monetary and fiscal policy can be contractionary or expansionary. Contractionary
policy is used when a country needs to control and lower the high inflation rate whereas
expansionary policy is used when a country is suffering from low economic growth
(Blanchard et al. 2017). Hence, for improving the economic condition of Singapore
expansionary monetary or fiscal policy is required. Considering, the case of expansionary
monetary policy for discussion. There are various kinds of expansionary monetary policies
such as buying bonds from open market and cut in bank rate (Gambacorta, Hoffman &
Peersman, 2014). Both the measures increase the liquidity in the economy. Suppose, in this
case the Monetary Authority of Singapore reduces the bank rate to boost the economy. A

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reduction in bank rate would lower the bank interest rate for lending and the investors will be
encouraged to take more loans and invest in the prospective business. Therefore, with
increased amount of loans, there will be more investment and the produce of the economy
will rise. To increase the production the firms will hire more employees or give wage raise to
the existing employees. Hence, the income of the people will rise and as a result, the
consumption will rise and thus the aggregate demand of the economy increases. Thus, with
increased amount of supply and demand, the equilibrium of the country will improve and the
country’s economy experiences a boost in the output. However, the rise in the price level
depends on the magnitude of the rise in aggregate demand and aggregate supply. If the
increase in supply is greater than demand then the price level may remain the same or
decline, whereas if the demand is higher than the magnitude of increase in supply then the
price level will rise and inflation rate rises correspondingly. This expansionary monetary
policy is known as
supply side policy as it
increases the production to
provide the essential
boost to the economy
(Chodorow- Reich, 2014).
The mechanism
is shown with the help of
diagram given below.

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Figure 1: Expansionary monetary policy
Source: (Created by the Author)
In the above figure, the effect of expansionary monetary policy can be observed. The
cut in bank rate increases the investment and thereby production of the economy. Therefore,
the supply increases and shifts the aggregate supply curve (AS) to the right from AS to AS1.
Employment in the economy has also increased due to need for workers to support the
expansion of production process. Therefore, the disposable income of people in the country
increases (Solt, 2016). As a result, aggregate demand increases that push the aggregate
demand curve to the right to AD1 from AD improving the equilibrium of the economy.
However, the price level has not increased as per the diagram because of the assumption that
increase demand just nullifies the increase in supply. This outcome can also be achieved by
implementing expansionary fiscal policy such as cut in the tax rate or increase in government
expenditure.
Article 2
Source
https://www.straitstimes.com/business/economy/inflation-in-check-but-higher-costs-
expected-for-essential-services
Summary and Analysis

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The inflation rate in Singapore is at check and thus the country is now relieved of any
inflationary pressures. The main components that has pulled the inflation rate down even
though the prices for healthcare, education and domestic services is expected to rise are low
prices for oil that kept the price of electricity low. It also reduced the private transportation
cost. It has led the Monetary Authority of Singapore to revise its earlier inflation forecast of
1.5 per cent – 2.5 per cent to 1 per cent – 2 percent. According to the economist of United
Overseas Bank, Barnabas Gan, the tight monetary policy implemented last year has helped in
keeping the inflation rate low. Strong domestic currency is another reason that has kept the
inflation rate low. It seems that the inflation rate is going to be low for longer period because
the price of food in the global market is not increasing significantly and the imports have
remained cheaper. Thus, there is no possibility of increase in inflation rate in the near future.
Apart from the low inflation rate, the growth in job was positive last year and rate of
unemployment rate was low too.
Both unemployment rate and inflation rate was low and thus the responsibility of the
Monetary Authority of Singapore has been lowered. However, if in near future if the inflation
rate moves up so high that it affects the economy adversely, then the government of
Singapore might take contractionary monetary or fiscal policy (Gogas & Pragidis, 2015). In
this case, assuming that the government takes contractionary fiscal policy that is the
government increases the tax rate and thus the disposable income of the people decrease and
thereby consumption decreases (Traum & Yang, 2015). Fall in consumption will pull the
aggregate demand of the economy down, owing to that the aggregate demand curve shifts left
ward from AD1 to AD2 (Demyanyk et al., 2015). Thus, fall in demand and shift in aggregate
demand curve causes the price level to fall. Price level and inflation rate are directly
proportional and thus fall in price level from P1 to P2 decreases the inflation rate (Afrin,

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2014). The mechanism of the change in demand and fall in inflation due to contractionary
fiscal policy is depicted in the diagram below.
Figure 2: Contractionary fiscal policy
Source: (Created by the Author)

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Conclusion
The discussion above can be summarized as the change in economic growth can be
influenced by the change in monetary and fiscal policy. The report discusses about the two
article regarding low economic growth and low and persisting inflation rate in Singapore. To
deal with low economic growth the option available for Monetary Authority of Singapore
(MAS) is expansionary monetary policy. MAS popularly alter exchange rate for
expansionary policy. However, in the report other possible expansionary monetary policies
have been discussed and show that how those policies work. On the other hand, Singapore is
experiencing low inflation rate so it does not need to take any measures as of now. However,
if the inflation rate increases then the government can take contractionary fiscal policy to
reduce the inflation rate. Contractionary fiscal policy reduces the demand and thereby price
level falls and causes inflation level to fall.

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References
Afrin, S. (2014). Fiscal Deficits and inflation: the case of Bangladesh. Monetary Policy
Review, 63.
Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2017). Are capital inflows
expansionary or contractionary? Theory, policy implications, and some
evidence. IMF Economic Review, 65(3), 563-585.
Chodorow-Reich, G. (2014). Effects of unconventional monetary policy on financial
institutions (No. w20230). National Bureau of Economic Research.
Chow, H. K., Lim, G. C., & McNelis, P. D. (2014). Monetary regime choice in Singapore:
Would a Taylor rule outperform exchange-rate management?. Journal of Asian
Economics, 30, 63-81.
Demyanyk, Y. S., Hryshko, D., Luengo‐Prado, M. J., & Sørensen, B. E. (2015). The Rise and
Fall of Consumption in the'00s.
Gambacorta, L., Hofmann, B., & Peersman, G. (2014). The effectiveness of unconventional
monetary policy at the zero lower bound: A cross‐country analysis. Journal of Money,
Credit and Banking, 46(4), 615-642.
Gogas, P., & Pragidis, I. (2015). Are there asymmetries in fiscal policy shocks?. Journal of
Economic Studies, 42(2), 303-321.
Liu, T., & Woo, W. T. (2018). Understanding the US-China trade war. China Economic
Journal, 11(3), 319-340.
Solt, F. (2016). The standardized world income inequality database. Social science
quarterly, 97(5), 1267-1281.

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Traum, N., & Yang, S. C. S. (2015). When does government debt crowd out
investment?. Journal of Applied Econometrics, 30(1), 24-45.