Inflation
Essay Q3
In the context of your country,
comment on the view that
monetary policy is the best way to
cure inflation. [15]
Planning - Skills
• Comment – skills • Context – Spore
needed.. • Approach for essay
• Best way to cure – • What concepts is
what format to adopt? tested? Inflation,
• Nos of policies to policies (monetary
raise for 15 m policy, others)
question
• Crucial skills needed
for L3 marks
Planning - Content
• What is MP? • MP – Spore version
• How does MP works - What?
to impact economy? - Why this method?
• Tools of MP
• Inflation – What?
• Why need for CURE?
• Other ways to cure
inflation.
Planning - Content
• Expected to demonstrate how • In addition, need to suggest and
monetary policy works. An awareness explain alternative policies (such as
that in Singapore, the use of monetary Supply-side Policies) that may be
policy involves using the exchange adopted to cure inflation where
rate rather than the interest rate as a monetary policy may not be as
tool. appropriate or effective.
• For limitations, expected to present • Expected to discuss the limitations of
their arguments along two main these alternatives in the Singapore
themes: context as well. This discussion of
alternative policies is necessary for an
• i) the limitations of the use of monetary adequate response to the keywords
policy in Singapore in dealing with the “best way” in the question.
types of inflation it is aimed at, namely
demand pull and imported inflation, • For evaluation, candidates need to go
and beyond evaluating the effectiveness
and appropriateness of monetary
• ii) the appropriateness and policy and alternative policies to attain
effectiveness of monetary policy in an E2 mark.
solving other types of inflation in
Singapore, in particular the main • While evaluating individual policies are
causes identified and explained in Q1. needed at the E1 mark, candidates
need to form meaningful conclusions
• A detailed explanation, with the aid of about the issue of whether and to
diagrams, of how discretionary what extent monetary policy is the
changes in the exchange rate in best way to cure inflation in order to
Singapore can be used to control both be awarded an E2 mark.
demand pull inflation as well as
imported inflation is expected for the
thesis.
Preamble – Monetary Policy in Spore
Normal MP ER
• Difficult in controlling interest • It has a strong effect on
rate due to openness to capital Singapore’s macroeconomic
flows and inactive secondary aims given her small and open
bond markets, i.e. Singapore is economy.
an interest-rate taker. • Since Singapore is trade
• Controlling interest rate will dependent and constitutes 3 -
destabilise exchange rate and 4 times her GDP, it makes
make it very volatile and may more sense maintain its
have adverse impact on trade. exchange rate stability.
• Purpose of ER policy –
maintain px stabilty / promote
LT EG
Introduction
• Monetary policy normally • This essay shall discuss
refers to the use of whether and to what
money supply or interest extent monetary policy is
rates to influence the the best cure for inflation
level of economic activity in Singapore
in the country. • Inflation, which is defined
• However for my country, as the sustained increase
Singapore, which is a in general price levels in
small open economy, our an economy, can be
monetary policy centres divided into 2 types:
on the exchange rate as demand pull inflation &
unilateral interest rates cost push inflation.
will lead to destabilizing
capital inflows & outflows.
Body
Thesis 1 Thesis 2
State State
• Yes, monetary policy is the best way • Exchange rate policy can also combat
to cure inflation in Singapore demand-pull inflation
• Exchange rate policy is highly effective
in combating imported inflation, which Elaborate
is a type of cost push inflation which • Explain how an appreciation of our
Singapore is very vulnerable to as she exchange rate can increase the price
is heavily dependent on imports of our exports in foreign currency thus
reducing (X-M) provided Marshal
Elaborate Lerner’s condition hold
• Explain how an appreciation of the
exchange rate can help keep price of Exemplification
imports low. • 1988 – 1997, appreciation of the S$,
• Keeping the price of imports low is prevent overheating of the economy
also important in helping to keep our
exports price competitive due to the Diagram
high import content of our exports.
• Illustrate with an AD/AS diagram
Exemplification
• Oil imports and food prices in 2008
Body
Anti-Thesis Other Policies
• Challenge when stagflation – • Explain briefly how contractionary
especially 2008 – 2009 period FP such as an increase in direct
• Global Crisis/ Rise in Oil and Food taxes can help reduce C & I
Prices • There are other types of cost push
• Appreciation or depreciation inflation such as wage push and
policy? profit-push inflation which requires
• Considerations if Em and Ex not other policies to solve.
greater than 1 • Explain briefly 1-2 other types of
• Exchange rate policy - alleviate cost-push inflation in Singapore
demand–pull inflation caused by and how other policies are needed
increase in other components of to combat it
AD other than external demand (eg • e.g for wage push inflation, wage
such as consumption expd). policies formulated by the National
Wage Council to ensure that rise
in wages are in tandem with rising
productivity
• Other Supply side Policy – CPF,
training, education, Manpower
Policy - Import labour
Pre-Conclusion
Evaluation: Stand
• Inherent problems with • ER and SS side bias of
– Fiscal Policy the Spore Govt
– Exchange Rate Policy
– Supply Side Policy • FP still operation but not
in terms G/ T in traditional
sense
• FP to promote supply
side conditions
Conclusion
• Being a small and open economy • However, in reality this may not be
which is heavily dependent on easy to achieve
imports, Singapore is highly • No single policy can realistically
susceptible to imported inflation be relied upon to achieve price
and exchange rate policy which is stability over time since
Singapore’s tool of monetary inflationary pressures could be
policy is one of the more important both demand-pull and cost-push.
ways to combat inflation. • The ideal is to use a combination
• However there are other causes of of appropriate policies to achieve
inflation which require other a non-inflationary sustained
policies to combat. growth for the economy over time.
• The success of the policies boils
down to the ability of the
policymakers to balance the
growth in spending or AD with the
expansion in productive capacity.
• If the balance is right then
economies can experience what is
called a non-inflationary sustained
growth rate.