State How The Following Transactions

QUESTION 1
a.
State how the following transactions would be recorded in Singapore’s’ Balance of
payments. In your answer state the item, the relevant account, and whether it is a
credit or a debit entry.
Exchanges relating to the inflow of foreign exchange will be recorded on the credit side and
outpourings of foreign exchange on the debit side inequality of portion. The sorts of the section
that would record inequality of portion record of Singapore as follows:
i) A Singaporean resident purchases a dairy farm in New Zealand
Debit Entry
Capital Account
This is a sort of debit area that would record in a basic situation the portion record of Singapore
as cash from Singapore will be paid to New Zealand.
ii) A UK resident visits their relatives in Singapore and spends SGD 600 shopping on Orchard
road.
Credit Entry
Current Account
This is a type of credit entry that would record in the balance of payment account of Singapore as
the spending of a US resident in Singapore is an income for Singapore.
iii) An Australian resident purchases a factory in Malaysia from a Singaporean resident
Credit Entry
Capital Account
This is a kind of credit section that would record in a basic situation the portion record of
Singapore as the cash will be gotten by residents of Singapore.

iv) A Singaporean company pays dividends to its Australian shareholders
Debit Entry
Capital Account
This is a sort of debit area that would be to be chosen based on the portion record of Singapore as
cash from Singapore will be paid to Australian financial specialists in a kind of benefit.
v) An Australian resident receives income for services rendered in Singapore
Debit Entry
Current Account
This is a sort of debit segment that would be chosen based on the portion record of Singapore as
cash from Singapore will be paid to Australian residents to render benefits in Singapore.
(b) Review the table below:-
unit Data S$m
Previous
period
Balance of Payments S$m 3,530.80 4,141.10
Current Account Balance S$m 19,600.60 24,194.50
Exports of Goods and
Services
S$m 224,918.40 220,269.20
Imports of Goods and
Services
S$m 191,669.00 183,147.20
Primary Income Balance S$m -11,611.60 -10,716.50
Secondary Income Balance S$m -2,037.20 -2,211.00
Reserve Assets
S$m
3,530.80 4,141.10
Official Foreign Reserves US$m 282,995.20 278,625.10
Net International
Investment Position
S$m 1,207,120.5

Provide an economic assessment of the data presented. In your answer refer to the
economic significance of the various accounts in the balance of payments, the role of the
central bank, international net debt, changes in foreign investment and changes in trade
flows, savings and investment differentials .
The balance of payments (BoP) is the international balance sheet of a nation that records every
international exchange in product, organizations, and assets longer than a year. As per the table,
there is a diminishing in BOP the rule reasons are portrayed underneath:
Current Account Balance
There is a decrease in current account balance at whatever point broke down from the previous
year. Running an insufficiency on the current account suggests that various countries are not
paying their way in the overall economy. There is a net outflow of intrigue and income from the
circular flow of income and spending. The current account doesn't have to balance considering
the way that the balance of payments furthermore joins the capital account.
Exports of Goods and Services
This is the best part for any association to have a positive charge. This shows the country is
advancing honourably. Making extraordinary things and there is an enthusiasm for the country.
Imports of Goods and Services
An extension in imports impacts the BOP as it can provoke a negative BOP. Notwithstanding the
way that imports are valuable for a country anyway, it impacts negatively on the BOP.

Primary Income Balance
The estimations show that there are more people to move money from Singapore. Despite the
way that they are helping the country create by living and working, this is affecting the BOP.
Secondary Income Balance
This is decreased and that is a positive sign as it is a debit for a BOP.
Reserve Assets
There is a decrease in Singapore's official property of monetary gold and foreign exchange
assets, similarly as Singapore's extraordinary drawing rights and reserve position in the
International Monetary Fund.
Official Foreign Reserves
Countries use their foreign exchange reserves to keep the estimation of their monetary gauges at
a fixed rate. There is a development in the reserves and at this essential hour, it will help us to
care for liquidity.
Net International Investment Position
The NIIP position is a huge check of a nation's budgetary condition and creditworthiness. In this
BOP estimations, we see a positive NIIP figure that shows that the family unit nation's duty
regarding assets is more noticeable than foreign nation's obligation regarding neighbourhood
nation's assets, thus making it a creditor nation.
QUESTION 2

In the context of National Income Accounting and the Intertemporal model: Consider a
country “smartville” with a closed economy real rate of interest of 3% while the prevailing
world interest rate is 1.5%.
Use the metzler diagram as a framework to critically evaluate the likely outcomes for the
“smartville” economy. In your answer refer to the current account balance, savings and
investment, comparative advantage, and discuss how “smartville” might gain from opening
up to trade with the rest of the world in this context.
If the world interest rate is lower than the 'Smartville' interest rate, by then the country would
have a current account inadequacy.
Metzler diagram
Effects on various fragments

Holding the response of private savings consistent, an extension in the spending insufficiency
will move national savings. Models:
● Government manufactures spending without growing taxes. Buyers don't change usage.
● Government cuts taxes without cutting G. Customers consume the total of their tax cut on
usage.
In case the organization runs an insufficiency today, they ought to bring taxes up later on. High
future taxes will decrease the current estimation of lifetime optional cash flow. Customers ought
to extend savings today.
If 'Smartville' opens the market they will have the alternative to Invest in creating business area
countries which can to a great extent be an unbelievable endeavour if the country you're placing
assets into has a couple of barriers to entry. Exactly when a country gets changed, protections
exchange regards moreover rise. Store boss and budgetary pros are reliably looking out for new
open entryways for advantage. Opening the economy reduces the political peril to budgetary
pros. For the organization to continue pulling in dynamically foreign investment
Monetary liberalization will be useful for the country. The essential goal is to have boundless
capital flowing into and out of the country to help improve and efficiencies inside the country of
source. The effects following liberalization are what should interest theorists as they can give
new opportunities to development and advantage.

QUESTION 3
Consider models of Exchange rate determination. Assume interest parity holds and the
return on a domestic asset is equal to the covered return on a foreign asset. In the domestic
economy the central bank decreases the interest rate in order to stimulate the economy.
Using both covered and uncovered interest parity conditions identify the direction
variables would be expected to move in response to the policy changes in order to restore
parity. What role do expectations play if any in this process?
Interest Rate Parity is a theory where the differentiation between the interest rates of two
countries remains proportionate to the qualification controlled by using the forward exchange
rate and the spot exchange rate strategies. Arbitrage is the activity of purchasing an asset in one
cash related market and selling it at an advantage in another.
The qualification between interest rates in two countries is refuted by the spot or forward money
premiums or confines so the examiners couldn't win an arbitrage profit by buying and selling the
cash related asset.
Uncovered Interest Rate speculation communicates that the ordinary gratefulness or decay of
particular cash is discredited by lower or higher interest rate. If Interest Rate Parity theory holds,
by then it can discredit the opportunity of arbitrage.
Let us consider investing € 1000 for 1 year. Here, we'll have two decisions to
invest −
The case I: Domestic Investment
In the US, acknowledge that the spot exchange rate is $1.2245/€1.
Thusly, we get an exchange for our €1000 at the rate of $1.2245 which gives $1224.50
We can contribute this proportion of $1224.50 at the rate of 3% for 1 year which yields $1261.79
toward the year's end. As such, the last return from this investment would be $1261.79.
Case II: Foreign Investment

We can moreover put €1000 in a foreign market, where the rate of interest is 5.0% for 1 year.
Thusly, €1000 at the rate of 5% for 1 year will give €1051.27
Let the forward exchange rate be $1.20025/€1.
Along these lines, we buy forward 1 year later at the exchange rate at $1.20025/€1 since we need
to change over our €1000 back to the domestic cash, i.e., the U.S. Dollar.
By then, we can change over € 1051.27 @ $1.20025 in future, for instance, tailing one year
which gives $1261.79. Subsequently, the last return from this investment will similarly be
$1261.79.
Henceforth, when there is no arbitrage, the Return on Investment is proportionate in the two
cases, paying little brain to the choice of investment strategy (home or foreign).
By and by, if the national bank of the domestic country reduces the interest rate to enliven the
economy, the domestic interest rate will become lower than foreign interest rates. In case foreign
cash doesn't have a forward refund or when the forward markdown isn't adequately tremendous
to counterbalance the interest rate advantage, an arbitrage opportunity is open for the domestic
monetary experts.
Thus, domestic examiners can to a great extent advantage from foreign investment. This will
invigorate more prominent investment in foreign cash by the domestic residents in want for
progressively huge yields.
I Want to accept a huge activity in this method. People start investing progressively more in
foreign assets because of the decrease in domestic interest rate. This will construct the interest
for foreign assets or cash which at long last prompts foreign money appreciation. This will bring
in the foreign cash to exchange at a forward discount which helps in restoring interest rate parity.
QUESTION 4

Consider theories relating to exchange rate determination in the Long Run. The domestic
central bank responds to the COVID 19 virus by increasing money supply via quantitative
easing measures.
A. Applying the Dornbusch’s sticky price model and assuming the exchange rate is not
managed directly by the central bank, explain the implications of the central bank
actions on the spot exchange rate (e)
In an unreservedly floating exchange rate structure without mediation from governments, exhibit
powers would choose the exchange rate regards. However, if cash takes on a preposterous worth,
either too high or unnecessarily low, the organization and the national bank can't ignore the
exchange rate if they wish to achieve medium-term focuses on improvement and low
development.
In the short run :The Dornbusch's tenacious worth model fights that the foreign exchange rate
will quickly explode to changes in the monetary game plan to make up for tenacious expenses of
items in the economy.
In the long run: As time goes on the expense of the spot exchange rate, unsticks, and adjusts to
the reality of these budgetary market costs.
Applying the monetary model, explaining the consequences of the national bank action on the
spot exchange rate and the repercussions of the national bank movement on the spot exchange
rate, national bank intervention can fabricate the volatility of spot exchange rates.
What are the key complexities in the monetary and Dornbusch models of exchange rate
affirmation?

The monetary model proposes that the expenses of a product are versatile and that purchasing
power parity reliably holds. The Dornbusch's tenacious worth model battles that expenses of
items are tenacious in the short run and that PPP holds directly as time goes on anyway doesn't
hold in the short run since stock costs adjust step by step relative with asset costs.
QUESTION 5
Consider the relationship between the exchange rate and the balance of payments.
Examine the case of a small country in the import and export markets under the elasticity
approach.
(a)Draw a separate graph for the import market and the export market illustrating the
effect of a rise in e, on the foreign price of imports and exports and the quantities of
imports and exports respectively.
The various implications of the authentic exchange rate can be for the most part amassed into
two essential classes. The fundamental characterization of definitions is made as per the
purchasing power parity (PPP), while the second relies upon the separation between the tradable
and the non tradable items

(b)What can be determined about the effect on the trade balance from a rise in e as a result
of your analysis in part (a).
Right, when the money of a country fabricates its e, its exports will become costlier causing a
diminishing in them, however, its imports will turn out to be more affordable achieving
augmentation in them. Along these lines, net exports of the country will rot inciting the decrease
in net exports and will as needs cause a leftward move in the complete interest twist AD.
(c)If there is less than 100% pass through how might this impact on import expenditure?
Officially, the exchange-rate experience is the adaptability of neighbourhood money import costs
concerning the close by cash cost of foreign money, routinely assessed as the rate change, in the
local money, of import costs coming about on account of a one percent change in the exchange
rate between the conveying and getting countries. An alteration in import costs impacts retail and
client costs. Exactly when the exchange-rate experience is increasingly important, there is more
transmission of growing between countries.
(d)Assume a small economy is below full employment. Illustrate and explain how a
reduction in the value of the domestic currency (rise in e) will impact on the trade balance
under the absorption approach.
The brief effects of degradation are augmentation in exports and abatement in imports with the
objective that the balance of payments lack can either be decreased or completely slaughtered.
The achievement of balance of payments congruity through corrupting

(X – M) is the net export or balance of payments work. It vacillates on the other hand with
income. (I – S) is the net investment work which changes clearly with the level of income. From
the outset has given (X – M) and (I – S) work, the amiability occurs at the income Y0. In this
agreement position, there is a balance of payments shortage signifying AY0.
The devaluation of home cash intensifies exports and diminishes imports so that (X – M) shifts
up to (X – M)'. Its intersection point with (I – S) happens exactly at the level scale at the income
Y1. Since no opening is left between (X – M) and the even scale, the BOP shortage has been
completely gotten out.
(e)Consider how you might model the impact of the COVID19 virus on a small economy
initially at full employment. Discuss likely outcomes using the absorption model.
Covid can lead to devaluation and also barricade the Exim. Hence, it will show a huge economic
downturn. Though the economy will be at full employment level there will be a recession and
that will hurt the economy. The outbreak and of the regulation measures inside small countries.
For instance, the car industry's middle of the road exports may fall generally more as the
business is geologically limited in the district where the flare-up of COVID-19 happened. Once

sectoral information is accessible the probable impact on the different worldwide worth chains
will become more clear
.
QUESTION 6
In the framework of the Swan model, assume that Singapore was achieving both internal
and external balance, prior to the outbreak of COVID 19. Assume that Singapore faces a
relatively inelastic IB schedule and a relatively elastic EB schedule.
A. Illustrate a likely outcome of the COVID19 virus on both internal and external
balance and mark Singapore’s current post virus position on a Swan Diagram as X.
Singapore is currently achieving outside balance anyway experiencing inflation
B. Briefly explain how and why an attempt to restore internal balance will disrupt
external balance
International
Prices /
Domestic
Prices
Real ExpenditureO X
y
Inflation
External Bal
(X-M)
Surplus
Unemployment
Deficit Internal Bal
(Full
Employment)
I
IV
II
III

The Internal Balance twist slants down from left to right. It shows that Lower the cost extent
which cutoff focuses on exports and imports subbing production, the higher must be the real use
to keep up the full business. The benefit or more curves address inflation and domestic veritable
uses excessively high near with exports and import substitute creation. To the other side, we
address work.
What automatic mechanisms may help restore internal balance? How effective might these
mechanisms be in the current economic situation brought on by the Covid19 virus?
In the structure of the Swan model, in the current money related situation invited on by the
Covid19 disease. the customized instruments that may help restore inside balance would be
decreased in domestic usage and lower esteem level.
C. Following the recommended policy assignment rules, what policies should be put in
place to restore general macroeconomic equilibrium.
FISCAL
The pros have proclaimed 3 packs of measures on February 18, March 26, and April 6,
signifying a total improvement of S$59.9 billion (12.2 percent of GDP). Assets to contain the
scene are about S$800 million (fundamentally to the Ministry of Health).
MONETARY AND MACRO-FINANCIAL
The MAS and the budgetary business announced a separate heap of measures to help individuals
and SMEs standing up to temporary income inconveniences related to the COVID-19 pandemic.
The group has three sections: (I) help individuals with meeting their development and security
duties; (ii) support SMEs with continued access to bank credit and assurance spread; and (iii)
ensure interbank financing markets remain liquid and well-working.

QUESTION 7
With reference to the IS-LM-BP analysis of a small economy like Ireland, answer the
following questions and provide the required explanation and diagrams.
a. Assuming Ireland trades predominantly within the eurozone, has perfect capital
mobility and a fixed exchange rate (Euro), examine the effect that an expansionary
monetary policy put in place by the European central bank has for the domestic
(Irish) economy.
In the economy where capital is splendidly versatile, the exchange rate is fixed the harmony level
in IS-LM-BP model is built up where the products showcase, currency market, and balance of
instalment is in balance that can be appeared as:
In this way, e is the balance point where harmony interest rate (i*) and balance yield (Y*) is
acquired. On the off chance that national bank picks an expansionary monetary arrangement, at

that point, it will shift the LM curve to one side and there will be abatement in the interest rate. It
very well may be appeared as:
Thus, it will diminish the interest rate and prompt capital inflow in the nation however the
exchange rate is fixed. In this way, the national bank will diminish the cash supply to keep up the
exchange rate fix. Subsequently, the LM curve will shift back to its underlying position. Thus,
the monetary arrangement isn't helpful.
b. To counteract the negative effects of the COVID 19 virus on the domestic economy
of a small open economy with a flexible exchange rate (such as New Zealand), would
you recommend a fiscal or monetary policy response? Use the IS LM BP model to
support your answer
Because of the impacts of COVID 19 infection, the utilization consumption in the economy will
fall which prompts a leftward shift in the IS curve from IS to IS'. It prompts BOP deficiency.
BOP shortfall will devalue the domestic cash because the exchange rates are adaptable. It will

prompt an expansion in the net exports and a rightward shift in the IS curve to its underlying
position. Henceforth, no mediation is required for this situation.
QUESTION 8
With reference to the IS-LM-BP analysis, answer the following questions and provide the
required explanation and diagrams to support your analysis.
Assume a country like the United Kingdom (UK) with high levels of capital mobility and a
flexible exchange rate, puts in place an extensive expansionary monetary policy. Examine
the likely effect that this policy has for the UK economy.
Expansionary Monetary strategy - > bringing down of interest rates - > Huge capital outflow - >
devaluation of money - > Increase in exports

The expansionary monetary strategy suggests an increase in money supply by the national bank,
this would shift the LM curve to the other side from LM1 to LM2. We have brought down the
interest rates from i1 to i2 and augmenting GDP from Y1 to Y2. The reserve balance was E1 and
the new congruity is E2, E2 balance is underneath the BP line, which suggests that the economy
would have a negative Balance of payments sway.
As we have a drop in interest rates, the examiners would no longer have any rousing powers to
keep their money in the UK, so they would take their money out from the UK and would place
assets into such countries which have a higher rate of interest. This would realize huge capital
outflow, thus provoking negative capital account sway.
As the monetary authorities are taking their money out from the UK, it achieves decline well
known for UK Pound sterling. As solicitation diminishes, the estimation of Pound sterling rots,
along these lines inciting crumbling of the UK money.

Here we have the outline, Decline looked for the Pound sterling, inciting a shift of Demand curve
to the other side from D1 to D2, hence we have declined in the exchange rate. i.e weakening of
the exchange rate. The devaluation of the exchange rate realizes an increase in exports, as
breaking down-home money makes imports costlier and exports more affordable. As such it
would realize an increase in exports for the UK, thus provoking Current account overflow.
Regardless, the shortfall in capital account is of course higher than the surplus in the current
account, so the general BOP account is in insufficiency (E2 agreement in the principle graph
underneath the BP curve).
How might an expansionary fiscal policy in the UK spill over to a smaller trading partner
(for example the republic of Ireland)? Illustrate and explain the macroeconomic
interdependencies between the UK and Ireland. What other factors might impact the
transmission of impacts between the two nations?

Expansionary Fiscal methodology - > addition of interest rates - > Huge capital inflow - >
vitality about money - > Decline of exports and augmentation in imports - > extended imports
from Ireland - > extended creation in Ireland - > extended business and GDP of Ireland.
The expansionary fiscal course of action infers an increase in government use and assessment
decreases, this would shift the IS curve to the other side from IS1 to IS2. We have an increase in
the interest rates from i1 to i2 and augmenting GDP from Y1 to Y2. The basic balance was E1
and the new concordance is E2, E2 balance is over the BP line, which prescribes that the
economy would have a positive Balance of payments sway. As we have increased interest rates,
the monetary pros would need to take points of higher rate of interest, so they would take their
money out from various countries and would store/put assets into the UK.

This would realize enormous capital inflow, along these lines provoking positive capital account
sway. As the theorists are investing in the UK, they need Pound sterling to do accordingly.
Here we have the outline, increase well known of the Pound sterling, provoking shift of Demand
curve to the other side from D1 to D2, along these lines we have increased in the exchange rate.
i.e vitality about the exchange rate. The vitality about exchange rate achieves a decrease in
exports, as recognizing home money makes imports more affordable and exports costlier. Thus it
would realize an increase in imports for the UK and reduce in exports for the UK, along these
lines provoking Current account shortages. In any case, the surplus in capital account is way
higher than the lack in the current account, so the general BOP account is in surplus(E2
congruency in the primary outline over the BP curve).
The UK is acquiring more and conveying less, it would provoke an increase in imports from
trading accessories like Ireland, along these lines it would realize an increase in progress in
Ireland as there is extended interest from the UK, increase creation prompts extended business
and thusly inciting income creation, more people land positions and they get incomes, therefore
provoking growing incomes in hands of people in Ireland and as they spend their income on

various product and endeavours, it prompts the creation of interest for various product and
adventures as well, hence extending making of various items and adventures and along these
lines further addition in work and incomes. In such propensities, the expansionary fiscal strategy
benefited the UK similarly as benefitted Ireland, that is called overflow sway.
QUESTION 9Consider a country with a fixed exchange rate. Assume there is initially macroeconomic
equilibrium, there is no flow of assets/ capital internationally i.e. zero capital mobility.
Then the Government undertakes an expansionary fiscal policy. Using the IS-LM-BP
framework
A. Illustrate the initial policy effect graphically.
Fixed exchange rate framework alludes to the arrangement of fixed exchange where the money
exchange rate is fixed at a given rate, and at whatever point there are vacillations from that
exchange rate, the national bank of the country intercedes to bring it back. Expansionary fiscal
approach alludes to a strategy of the legislature of the country, through which the administration
impacts the total interest, and value level in the economy. Expansionary fiscal approach infers
that there is an expansion in government spending or a decrease in taxes by the administration.
Both of these outcomes into an expansion in the total interest in the economy.
Under the fixed exchange rate system, an expansionary fiscal arrangement if the legislature will
result in an underlying increment in both the interest rate, just as the income level.
This has appeared in the figure underneath:

As the legislature embraces expansionary fiscal arrangement, the IS curve shifts to one side. The
equilibrium moves from A to B.
The equilibrium is precarious as under the fixed exchange rate framework, the national bank
must need to intercede to accomplish the fixed exchange rate.
B. Due to the policy what is the resulting disequilibrium.
Under a fixed exchange rate framework, any preoccupation from the fixed exchange must be
remedied by the national bank of the economy. The national bank intercedes till the equilibrium
is set at the fixed exchange rate.
In the given case, as appeared in the above figure, the underlying equilibrium was at A, however
the expansionary fiscal strategy results into another equilibrium away from the fixed exchange
rate at point B. Accordingly, the subsequent disequilibrium is at a higher interest rate (I') at B.
What action does the central bank need to undertake to maintain the fixed exchange rate?
The expansionary fiscal strategy results in an expansion in interest rate. This higher interest rate
will result in a spending overflow. To keep up the fixed exchange rate, the national bank needs to
mediate to diminish the estimation of domestic cash.

The national bank will do this by selling the domestic cash, and purchasing foreign money in the
foreign exchange advertisement. This will build the supply of domestic cash, subsequently
shifting the LM curve to one side.
This appears in the accompanying figure:
The LM curve will shift to LM'. The new equilibrium will be at C, where the IS' converges LM',
and the nation can keep up its fixed exchange rate, at interest rate I. In this way, the expansionary
fiscal strategy, and afterwards the mediation by the national bank has come about into an
increment in the income level of GDP in the economy.
C. What is the net effect on Y as a result of the monetary expansion?
The expansionary monetary arrangement by the national bank will bring about an increment in
money supply in the economy. This has brought about an expansion in the income level. At first,
the income was at Y, at that point it expanded to Y1 due to expansionary fiscal strategy. Lastly,
it arrived at Y'. In this way, the net impact on Y is an expansion in Y, from Y to Y' as appeared
in the above figure.
QUESTION 10

“A small open economy that relies heavily on trade with other nations is better positioned
to adjust to external shocks if it has a floating/ flexible exchange rate mechanism” Discuss.
In your answer consider automatic adjustment mechanisms.
The reason behind this is under a floating/versatile exchange rate framework the exchange rates
rely upon the supply and solicitation levels of the market. In this manner, the floating exchange
rate might act naturally "modifying" suggesting that it responds to changes in the private market
in light of shifts well known and supply. Exactly when one relies seriously upon exchange with
their countries a floating exchange may truly influence execution and money related results, as
the exchange rate isn't known and is balanced ward accessible, where under a fixed exchange
rate the exchange among two monetary structures is set and known.
How might the current COVID 19 context impact on the adjustment process?
The current COVID 19 impact on the adjustment method is realizing colossal changes to the
exchange rates. The reason behind this is there have been critical aggravations in supply chain
networks all around the world, for basically every firm. This has influenced the supply side,
which is achieving shortages. At the same time, there have been shifts well known for certain
business divisions, which has come about in like manner progressively mainstream. In this way,
there have been tremendous swings and volatility in the floating/versatile exchange rates in the
business segments during the past 30-60 days. The impact this has on the change methodology is
that it makes it difficult to envision what the exchange rate should be until the business areas
settle.
The general thought here is that when one partakes in a huge amount of exchange with foreign
markets this can result in shrink a fixed or versatile rate, all around the floating rate can achieve
unexpected changes to the exchange rate, which may have a positive or negative impact on a

business, contingent upon the remote possibility that they fall on the great or irksome side of the
exchange rate.