Suggested Answers of BT2 Revision Package - ASKnLearn

The essay discussion can be divided into 2 major parts:(A) Generally ineffective policies e.g. fiscal and monetary policies(B) Generally effective policies e.g. SSP and Trade policies(C)Part A : Fiscal and Monetary Policies(Basically Ineffective Policies in the SG contexts)Thesis (1) – Use of Fiscal Policy – Keynesian style e.g. pump-priming or fiscal tighteningRecession Threat:To deal with possible recession arising from weakness of the US and EU economies, the SG govt couldresort to ‘pump-prime’ the economy to head off a recession e.g. building infrastructure like roads; givingout shopping vouchers or unemployment benefits etc. The aim is to generate multiplier effects to boostspending in order to cushion off adverse impact on AD due to the slump in exports to these major tradepartners.Anti-ThesisIn the context of a small and open economy like Singapore, this measure has very limited usefulnessbecause of huge leakages arising from high propensity to import and save. The huge leakages haveresulted in a very weak K effect (i.e. K value/size is less than 1). In fact, given a k value of 0.5, anyincrease in G spending by say $1 will generate an expansion of the national income by only 0.50 cents.Inflation ThreatTo dampen inflationary pressures, the government could resort to fiscal tightening measures e.g. cut Gspending and raise Taxes.Anti-ThesisHowever, using fiscal tightening measures to dampen inflationary pressures is likely to be ineffectivebecause the root cause of inflation, as described in the above scenario is not excessive spending. It isdue to rising property prices and fuel costs. These are largely cost-push inflationary pressures and notdemand-pull. Thus, tightening fiscal spending would only worsen recessionary pressures without havingmuch impact on dampening inflationary pressures.Thesis 2 - Use monetary Policy