For all 4 macro goals, it is impt to know: 1) Why is it important? 2) What are the causes?

3) What are the policies? Why is keeping inflation down important for Singapore? Price competitive of export! Higher inflation means higher cop. Given that demand for export is price elastic, export revenue falls as prices increase. + small domestic market of 5m + Export is >200% of GDP FDI : higher cop might mean lower expected profits/ lower rate of returns to investment => MNCs relocate to lower cost countries like VIC. In case of Singapore especially, inflation has implications on our competitiveness as an exporter and destination for FDI. Falling X and FDI on macro goals: Falling REAL/ACTUAL growth as AD falls. Higher dd-def UE. BOP: current account worsens as X falls. FDI falling means capital account worsens. [go refer to notes on internal and external effects of inflation]

CAUSES: excess AD [dd-pull] + AS shifting upwards [cost push] AD: increase in C/I/G/X from AD1 to AD2 Economy is moving closer to Yf Less spare capacity/ less un-utilized resources Firms compete for these FOPs Prices of FOPs, such as wages & rents will increase Increase in COP: to be passed on to consumers as higher GPL

 Leading to demand pull inflation [just like your inventories booboo, this is to be NIAMED] Singapore: Major source is X In other countries with big domestic markets, it will be C and I Singapores solution to oversized X: ex/r strengthening/appreciation so that Px will increase in foreign currency USA/China/EU/Indias response to oversized C and I: Taxes: income tax increase => disposable Y falls, C falls increase in corporate tax, expected returns to I/ expected profits fall, I falls. Interest rates: Increase in i/r, increase in COST OF BORROWING. For I : fall in expected profits, I falls For C: higher returns to savings, C falls Reduce G spending. BUT while combating DD-pull inflation, C / I / G / X falling may mean REG falls + higher DD-Def UE Know these policies that attempt to decrease AD to reduce inflationary pressure. These policies are generally known as CONTRACTIONARY.

During a recession, AD should be boosted. Same policies, but just the reverse, e.g. cut taxes and interest rates. These policies are EXPANSIONARY. BUT, so far we have only talked about DD: REG, DD-def UE, DDpull [dramatically shrug your shoulders] WHAT ABOUT SUPPLY? Question: As a SMALL RESOURCE POOR COUNTRY, what might be the major source of cost push inflation in Singapore? THATS RIGHT! Its imports, children! [BEAMS] Imported inflation is very serious for Singapore As a small resource poor country, THE DEMAND FOR IMPORTED F3 [FOOD, FUELS, FOPS] IS highly inelastic. Furthermore, being small, Singapore is unable to influence world prices. As a price taker, Singapore is vulnerable to external [supply] shocks such as natural disasters in major agricultural countries such as China, Australia and Thailand. Singapores response to imported inflation is the strengthening of the Singapore dollar. Recently, MAS did that to combat high oil prices [partly due to political instability in the Middle East]. In addition, Singapore diversifies our food sources, so as not to be over-reliant on one supplier. Another source of cost-push inflation is wage-push. Labour unions demand higher wages, and this raises the cost of production, shifting AS upwards. However, this is less a problem in Singapore because Good tripartite relations between the government, labour unions and the employers

 National Wage Council advocating that wage increase < increase in productivity to keep unit cost low Various government policies to boost productivity