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(Suggested Answer)

Discuss the view that a strong Singapore dollar policy has been the most appropriate
policy in overcoming the main economic problems faced by Singapore in recent years.
[25]


Answer Remarks
The Spore Govt adopts a managed float system for the Spore dollar, such that she
aims to have a gradual and modest appreciation of the S$ under the managed float
system whereby the S$ given is an upward bias against a trade-weighted basket of
currencies of its trading partners and competitors.

Hence, a strong S$ policy means an appreciation of the SGD, the external value of
the SGD rises, and now it costs less than before to buy our trading partners' goods,
for eg, Msia goods. It can be achieved by raising the demand for or lowering the
supply of SGD. (Sketch the market diagram for SGD, and explain with it)

Alternatively, the MAS can deliberately revalue the lower and the upper limit of the
trading band upwards, so that we obtain a stronger SGD. (again, refer to diagram to
explain)

Step 2:
concepts
marks for
cause
In recent years, Spore reliance on imports has seen her experiencing a higher rate
of imported inflation as price of oil and other commodities rose.

Also, our reliance on trade and exports has seen Spore growing slower as there is
much weaker demand for exports from US, E.U and Japan. Hence, actual growth
slows down due to lower AD.

Finally, globalisation has seen more rapid rates of structural unemployment due to
rapid shifts in comparative advantages as many regional economies catch up with
Singapore trade patterns.

Step 3:
concepts
marks for
effect
In view of such recent problems, A stronger SGD has managed to overcome some of
the main macro problems.

Signal
statement
In order to overcome the problem of imported inflation, MAS has made the SGD
stronger, by buying up S$ to raise the external value of the S$. This raises the
demand for S$ and causes an appreciation of the S$. By allowing the gradual and
modest appreciation of the S$, the MAS seeks to combat the threat posed by
imported inflation.

Such as appreciation of the S$ lowers price of imported raw materials, commodities
and finished products in domestic currency. Thus, prices of imported inputs and
hence cost of productionfall. This lowers cost-push inflation shifting SRAS to the
right, and lowers GPL (use AD-AS diagram to explain)

This is especially important given the high import content of its exports.
-
S4
analysis
on SGD &
inflation
The strong S$ policy has also overcome the problem of lower economic growth.

The stronger S$ policy can enhance FDI by giving investors confidence in the
S4
analysis
on SGD &

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Singapore dollar as expected future returns on investment is likely to retain its value.
This raise AD and enhances actual growth in SR (explain and illustrate with the
same AD-AS diagram). Also, in LR, a stonger SGD benefits potential growth as the
productive capacity, i.e. LRAS is higher as well.

growth
However, the strong Singapore dollar policy has not been the most appropriate
policy in overcoming certain main economic problems.

Signal
statement
Although the strong SGD does combat imported inflation very well, there is a conflcit
with the BOT objective.

For eg, the strong S$ reduces Singapores export price competitveness. The
increase in P
x
leads to a more than proportionate fall in Qty DD
X
. The Marshall
Lerner condition shold be satisfied, i.e PED
X
+ PEDm>1. This is because based on
the nature of Singapores exports being partly low- and middle- value-added
manufatucring goods such as computers and consumer electronics, such exports
face several substitutes from the regional economies.

The worsening of the B.O.T sees a fall in AD, a fall in actual growth and employment.
(Explain with AD-AS diagram).

S5
Another limiitation lies in the effectivessnees of the stronger SGD in attraxcting FDIs.
Unfortunately, FDi relies on many more factors, rather than a stong SGD only, ushc
as a skilled labour force, good infrastrtucural network, sophitisacated communication
and computer know-how, strong intellectual property laws., etc

A strong SGD alone cannot attract significant levewls of FDIs.

S5
Another problem is the need of MAS to maintain a huge foreign exchange reserves
to conduct its exchange rate policy.

This implies a trade off with domestic goals, for eg, such reseerves can be otherwise
used to build more infrastrucutral needs that can raise the LRAS of Spore.

S5
Also, a strong ER cannot solve structutal unemployment, as it is basically a problem
of skills mismatch. However, the strong Singapore dollar policy has not been the
most appropriate policy in overcoming certain main economic problems.

Signal
statement
Due to the changing nature of comparative advantage in light of globalisation,
especially with the rise of emerging economies like China and India, structural
unemployment essentially means a skills mismatch problem that poses a threat to
low skilled workers in declining industries.

Appropriate SS-side policies would need to be employed instead. For eg, manpower
policies to retrain and upgrade skills of workers facing the threat of structural
unemployment. E.g. Skills Redevelopment Programme for InfoComm to retrain
displaced workers for employment in InfoComm sector, WDAs Workforce Skills
Qualification (WSQ) programme to train workers in sector specific skills, job
redesign to make jobs more attractive to workers especially among the older
workers.

S4 (intro
a new
cause,
due to
the
absolute
word:
most)

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To overcome it is necessary to identify and develop new growth industries for job
creation to develop new comparative advantages, for eg Spore has targeted the
Environment and Water Technology sector, Interactive Digital Media sector as new
sources of growth. Hence, the new training has to be geared towards such
industries needs.

S4
However, we face time lag needed to retrain workers and to develop new growth
industries. On top of the cost of financing training, we face uncertainty in the success
of such training because there is a potential risk in the selection of such winning
industries.

If the industries turn out to be unable to develop a new CA, the skills learnt would be
quikcly obselete. Not forgetting the need for the workers to be willing and able
toundergo training. The mindeset change is needed for any significant degree of re-
newing Spore industries.

S5
As to attract more FDIs, Spore can adopt an expansionary FP, with SS-side effects.
For eg, an incomes policy that ensures productivity growth outweighs wage growth,
so that firms enjoy higher profit levels and find Spore more attractive.

Also increase G on physical and social infrastructure spending, spending on R&D,
education provide conducive environment to support foreign investors increase
FDI incentive raise FDI. Also can lower T cuts in corporate taxes to raise the
rate of return from I for foreign investors increase FDI incentive raise FDI

S4
However, if lower direct and raise indirect tax, in order to maintain current tax
revenue, cost push inflation will worsen!

S5
Finally, in order to keep export demand high, can push for more FTAs and boost
productivity to lower export prices. Plus kick in the flexi-wages policy, so that firms in
the export sector can stay solvent and remain in production and to minimise
retrenchment.

S4
In summary, we have explained that the strong Singapore dollar policy is indeed in
very important in solving imported inflation and attracting FDIs. However, its not the
most appropriate policy in overcoming structural unemployment. Supply-side policies
and incomes policies are needed instead.





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KNOWLEDGE, APPLICATION AND ANALYSIS
L1 Where the answer is mostly irrelevant and contains only a few valid points
made incidentally in an irrelevant context.

For an answer that shows some knowledge of exchange policy and/or one
other policy targeted at the macroeconomic problems. The question has not
been properly grasped, and there is inadequate development of analysis
AND application.
1-9
L2 For an accurate but undeveloped explanation of the use of exchange rate
policy for Singapore and 1 other relevant policy in addressing the main
economic problems faced by Singapore in recent years.
Little reference to the nature of the Singapore economy. No attempt at
evaluation.

Expect an accurate though undeveloped explanation of the use of exchange
rate policy for Singapore and at least 2 other relevant policies in addressing
the main economic problems faced by Singapore in recent years.
10-14
L3 Expect a good knowledge of the facts and theory of the question. Clear
evidence of the ability to present a logical and reasoned analysis. Good
attempt at examining the appropriateness of exchange rate policy weighed
against the use of at least 2 other policies for Singapore set in the context of
the main macroeconomic problems in recent years and the underlying
nature of the Singapore economy. Good attempt at evaluation by providing a
clearly reasoned structure to the whole answer.

Expect a thorough knowledge of facts and theory with an excellent ability to
describe and explain this in a precise, logical, reasoned manner. Excellent
attempt at examining the appropriateness of exchange rate policy for
Singapore set in the context of the main macroeconomic problems and the
underlying nature of the Singapore economy.
15-21

EVALUATION
E1 For an unjustified judgment. 1-2
E2 For a judgment based on analysis 3-4