JC Econs Essay Demand Side Management Policies Model Answers
One of the nigger concerns for the Singapore government to the relative lack of appropriate macro econs policies to achieve her macroeconomics goals and objectives.
Are demand side management policies alone able to achieve the goals of low inflation, high and sustained growth, etc, or do we need complementary policy measures?
Question
(a) Explain how demand side management policies can be used to increase the level of economic activity. [10]
(b) In Singapore, much greater emphasis has been given to the supply-side effects of fiscal policy. Evaluate the view that fiscal policy is only useful for its impact on the supply side of the S’pore economy. [15]
JC Economics – Demand Side Management Policies
Introduction:
Define key terms: Monetary Policy, and Fiscal Policy
Monetary Policy refers to the central bank’s deliberate action to alter the country’s money supply, i/r or exchange rate so as to influence AD.
Fiscal policy refers to the use of government spending and taxation to influence AD.
The level of economic activity is determined the level of Aggregate Demand (AD), which is the total spending on an economy’s products at different GPL in a given time period. It consists of four components: consumer spending (C). investment (1), government spending (G) and net exports (X M).
Body:
Explain how the respective MP and FP tools can be used to ↑ AD through increasing its components (illustrate with diagram)
Expansionary Monetary Policy: Money supply: ⇒ ↑ MS more money available for spending ⇒ ↑C↑
Interest rate: i/cost of borrowing cheaper to borrow to finance purchase of consumer durables ↑ C; i/r cost of borrowing higher expected i returns to investment higher MEI & Investment (I) ⇒ AD⇑
Exchange rate: eg: S$ → exports relatively cheaper, imports relatively more expensive (X-M) 1, assuming Marshall Lerner condition holds ⇒ AD ⇑
(For new syllabus, no longer required to refer to Marshall-Lerner Condition. Just acknowledge that PEDx > 1)
Expansionary Fiscal Policy: Govt spending: ↑ Govt spending (G) → ↑ AD
Taxation (direct tax – personal income tax and/or corporate tax): -personal income tax →→ ↑ disposable income → ↑C ↑AD corporate tax → after-tax profits greater incentive to invest↑ ↑AD
Conclusion
Expansionary MP and FP help ↑ AD NY (actual growth)
Expansionary FP not only can ↑ AD, but is also able to ↑ AS in LR (supply side effect)
Part (a) Marking Scheme:
L3: A detailed response demonstrating economic rigour in analysis.
L2: An answer which lacks rigour in explanation or an answer that only focuses on 1 policy.
L: An answer which shows some vague knowledge of how MP and FP affects AD, containing inaccuracies & errors.
JC Econs Tutor’s comments:
In able to, provide some linkage to part (b) in your conclusion.
JC Economics – Expansionary Fiscal Policy & Supply-Side Effects for S’pore
Introduction: supply side effects: ↑AS (LR effect)
↑ AS due to: (1) ↑ quantity of resources, (2) ↑ quality of resources (3) advancement in state of technology
Explain that Singapore uses FP to achieve sustained growth in the long term via ↑ AS (potential growth)
Body:
Thesis: FP is useful for its impact on the SS-side (long term goal-potential growth)
Eg: ↑ G on training/upgrading the skills of labour force → ↑labour productivity → efficiency → ↑ AS
Eg: Skillsfuture : fund for Singaporeans to train for a digital future. (A one-stop portal that enables Singaporeans of all ages to make informed learning and career choices, so that they can pursue their skills and career development throughout their lives.)
E.g. Singapore Workforce Development Agency (WDA): If an employer sends worker for the training programmes under the Singapore Workforce Skills Qualifications (WSQ), he/she can receive course fee funding from the Skills Development Fund (SDF)
Eg: G on R&D (building of world class research centres and science hubs) and infrastructure → ↑ quantity and quality of resources → ⇑ AS
E.g. Infocomm Development Authority of Singapore (IDA): to cultivate a vibrant and competitive infocomm industry in Singapore – one that attracts foreign investment and sustains long-term GDP growth through innovative infocomm technology development, deployment and usage in Singapore – in order to enhance the global economic competitiveness of S’pore.
Eg: ↑ G (as above) / corporate tax → incentive to invest ➔ 个 1 个 quantity of capital and advancement in state of technology → AS o E.g. Singapore government reduces corporate tax from 20% to 18% in 2008 (pro business policy) → make S’pore a stronger competitor to Hong Kong (17.5%) so as to attract more investors to SG
Anti-thesis 1: FP has limited impact on AS
FP alone may not be able to encourage I (other factors affecting I, e.g. interest rates and expected yield, business outlook) thus limited impact on AS in LR:
E.g: Limited impact on investment due to relatively high interest rates → ↑ cost of 个 borrowing → may not ↑ I → may not ↑ AS in LR
Eg: Time Lag: FP takes some time to take affect → may not be able to see ↑ AS in short period of time
Eg: Financing G in fiscal policy may have offsetting effect on AS: E.g. Rise in G to achieve sustained growth strain govt’s budget position → may need to be financed by high taxes in the future disincentives effect on work and investment → may result in fall in AS.
Anti-thesis 2: FP is also useful as a DD mgmt tool to achieve short term macro goals
Eg: Expansionary FP: ↑ G &/or ⇑ AD and NY, output and labour employment by multiple amount → enjoy economic growth (actual growth) and reduce unemployment rate
Eg: During times of economic slowdown, govt adopts expansionary fiscal policy (FP) to increase AD so as to relief the adverse effects on the economy → pump – priming measure / social security net e.g economic relief / New S’pore Shares etc.
However, limitations of FP as a D management tool: o Singapore has small multiplier (k) value due to high MPS and MPM → effect on NY, o/p and N+ is small → minimal impact on DD-side of the S’pore economy. Also, SG has a small domestic demand (i.e one-third of total demand) any ↑ G and/or ( direct tax↑ C) will not be able to AD significantly → minimal impact on DD-side of the S’pore economy.
Government failure → Inaccuracies in govt’s prediction of how much to inject to stimulate economy → there may be overshooting → since Singapore is very near to full employment demand pull inflation may result (conflict with other macro objectives)
(Qn: is this a strong point to use?)
Evaluation:
Use context of SG to make a sound judgment: FP is a must-have policy even though it is not very effective.
Conclusion: Synthesis – make an overall judgement
In Singapore, the effectiveness of fiscal policy as a Demand side policy tool is limited by our small multiplier due to high MPS & MPM, hence S’pore govt’s policies does indeed tend to have a strong supply-side focus.
In S’pore, FP is used mainly to boost labour market incentives, productivity and investment. This involves building up world-class infrastructure, enhancing capabilities, investing in R&D, establishing a pro-business fiscal environment for the private sector to flourish. The reduction in corporate tax and personal income tax rates encourages investment and work incentives. All of these have a long term impact on the supply side. Hence, FP is used by S’pore govt not only to stimulate actual growth in SR but more importantly to sustain potential growth in LR due to its SS-side effects.
Marking Scheme for JC Econs essay:
L3: A balanced response demonstrating economic rigour in analysis of side and demand-side effects of fiscal policy and its limitations, with good application to Singapore context.
L2: An underdeveloped answer which lacks rigour in explanation, OR A one-sided answer.
L1: An answer which shows vague knowledge of the supply-side effects policy, containing inaccuracies & errors.
Evaluation
E2: Reasoned judgement (e.g. ability to justify that due to small multiplier and other limitations, impact on demand side of FP is not significant, thus FP is more useful for its supply side impact in Singapore)
E1: Mainly unexplained judgement
Econs Tuition teacher’s Remarks: Most students should expect at least 20 out of 25m for this simple essay question. More on this in our Econs revision lessons.)