Suggested Answers of BT2 Revision Package - ASKnLearn

2 different approach to conduct monetary policy:Interest Rate versus Exchange Rate Centered monetary policy2.1 Conventional method of controlling interest rates is not used.The MAS or central bank does not control interest rate in order regulate liquidity or volume of credit ormoney supply. As SG is trade-dependent economy with a small and open capital market, the governmenthave chosen to manage the Sing$ exchange rate instead of controlling interest rates.FYI onlyTo control rising property prices the MAS used regulations e.g. restrict loans for buying property to controlinflationary pressures due to rising property prices.Evaluation:Cooling measures e.g. restricting home loans targeted at keeping property prices from soaringMay not be very effective if there is a influx of capital from foreigners who are cash rich and looking forbetter returns from their investments. Foreign buyers of property contribute to high property prices.[ Students wont be penalized if they don’t refer to cooling measures]2.2 Exchange rate centered monetary policyThis is often used as SG key anti-inflationary tool to counter imported cost-push inflationary pressures [refer to MAS policy of “gradual and modest appreciation” or “Grama Policy” ]Effectiveness(1) Might not be useful in fighting inflation…Strengthening the currency might not be effective in dealing with soaring property prices/asset bubbles orrising COE prices originating from domestic ( as opposed to imported) sources.According to some economists, the GRAMA policy has unintentionally caused soaring property prices andasset bubbles. Foreigners are taking advantage of the GRAMA policy to park their money/funds in SGand to invest in property