Suggested Answers of BT2 Revision Package - ASKnLearn

economic growth, a fall in demand-deficient unemployment. This would also reducedemand-pull inflation. A gradual appreciation of the S$ would keep the price of imports lowand this would be important due to Singapore’s importdependence. This would keep cost of production of producers in Singapore low and hence,this keeps cost push inflation low.Knowledge, Application, Understanding and AnalysisL3L2L1Clearly supports with appropriate reasons why Singapore chooses exchangerate over interest rate as a monetary policy Answer shows depth.Some reasons were given on Singapore’s choice of monetary policy but maylack substantiation.Scanty description of reasons on Singapore’s choice of monetary policy butlacks depth.7 – 105 – 61 – 4(b) Assess the impact of the revaluation and the changes made to the currency’strading band on the Singapore economy.[15]A revaluation of the S$ refers to the increase in the value of the S$ brought about throughintervention by the government i.e. purchase of S$. The government sought a gradualappreciation of the S$ that would bring about internal and external effects on the Singaporeeconomy. The external effects of the revaluation of the S$ and the steepening and wideningof the currency’s trading band include an improvement in the balance of trade and in turn,cause the balance of payments to improve.Price of imports will fall and this translates into lower costs of production i.e. lower importexpenditure as quantity demanded of imports will increase less than proportionately due toSingapore’s import dependence. Lower costs of production translates into lower prices ofexports that will offset the increase in price of exports due to the revaluation and hence,BOT improvesIn addition, the improvement in net exports would result in an increase in aggregate demand(AD) and hence, cause national income to increase via the multiplier effect and result in theincrease in actual economic growth.An additional internal effect of the revaluation would be demand-pull inflation. Demand-pullinflation would result when the economy is near full employment and hence, the increase inAD would cause an escalation in prices. Any increase in national income may be purelynominal and hence, there might then be a fall in real national income levels. In addition,demand deficient unemployment would decrease.