JC Economics Essay Series #9 – Fiscal Policy & Inflation

JC Economics Fiscal Policy & Inflation Essay Model Answers 

A sample question on the goals of economic growth and inflation, as well the appropriate macroeconomic policies.

Higher oil prices could lead to inflation and pose a risk to Singapore’s growth. Explain the above assertion and discuss whether fiscal policy is the best policy to overcome the macroeconomic problems mentioned [25]


JC Economics Essay Outline – FP & Cost-Push Inflation

Suggested Answer Part (a) Outline

Higher oil prices => imported cost push inflation

Explain and illustrate with AD/AS framework: Impacts on the economy: growth, GPL, unN, BOP

Fiscal Policy to solve Cost push inflation:
Fiscal supply side:
Explain how it work:

Alternative policies:
Exchange rate policy:
Alternative energy:

Final Conclusion:


JC Economics Essay – Macro Policies & Econs Aims

Singapore is an importer of oil and higher oil prices can lead to a number of economic issues in the economy. This includes slowing down growth and causing inflation in the country. Oil is an important input for production. Higher oil prices will increase overall. costs of production leading to a cost-push Inflation in Singapore.
(Elaborate with the aid of a diagram.)

In addition, higher oil prices may also adversely affect the various components of the aggregate demand ie consumption, investment and exports leading to a fall in GNP. This poses a risk to growth.

The most significant concern of higher oil prices for Singapore is its implications for global economic growth. Rising oil prices usually leads to a slower world growth and this adversely affects the income of our export markets. Our exports will thus suffer as demand falls.

Extent of impact depends on the extent of the oil price increase. – Globalisation and competition from emerging countries such as China and India may cause producers to be more subdued in wanting to pass on the higher cost to consumers. Instead they may mitigate this by being more efficient in their usage of oil and even switching to alternative energy sources.

In the face of the above problems of cost-push Inflation and slowdown of growth, the government can use fiscal policy to overcome them. Explain how contractionary fiscal policy works to overcome cost-push inflation. However, while using a contractionary fiscal policy can lead to a reduction in aggregate demand and hence inflation, it has the effect of worsening the growth of Singapore. Thus fiscal policy is not the best measure to overcome the 2 problems of inflation and reduction in growth.
(Note: for a sure Level 3 answer, this paragraph should not even be added to the answer. Why so?)

Hence to solve cost-push Inflation and the slowdown of the economy due to higher oil prices, it is more appropriate to use supply-side policies. Elaborate on these.

In addition, since the source of the cost-push inflation is due to rising prices of imports, it is also appropriate to use the exchange rate policy. By allowing the Singapore (Sin) dollar to appreciate gradually, Imports will become cheaper in terms of local currency and this helps to negate the higher prices of oil In US dollar.

Evaluation Fundamentals of economy must be strong otherwise difficult to keep supporting Sin dollar. Also it has adverse impact on exports. Therefore need to find the right balance. Government can also use trade policies FTAs and promote exports etc. (However, inflation is a problem you want to solve fast, not slow.)

In conclusion, fiscal policy alone is not the best policy to fight the economic problems that arises in Singapore due to higher oil prices. A combination of policies is needed and they need to be able to address the root cause of the problem.

H2 Essay Marking Scheme

L1 (1-9):  An answer that shows some knowledge but does not address the requirement of the question. Basic errors of theory or an Inadequate development of analysis is evident.

L2 (10-14) An answer that explains how rising oll prices result in slower growth and cost-push inflation. Also able to explain how fiscal policy can be used to solve the macro problems. However, elaboration lacks depth and application to the Singapore economy.

L3 (15-20) A well-balanced and in-depth discussion addressing the requirements of the question and shows application of concepts to the Singapore economy.

E1 (1-2) For an unexplained evaluative discussion on whether fiscal policy is the best policy to overcome the macroeconomic problems,

E2 (3-5) For an evaluative discussion of using fiscal policy to overcome the macroeconomic problems and the effectiveness of the other policy measures.


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