QUESTION 1

(a) State how the following transactions would be recorded in Singapore’s’ Balance of payments. In your answer state the item, the relevant account, and whether it is a credit or a debit entry.

(i) A Singaporean resident purchases a dairy farm in New Zealand

(ii) A UK resident visits their relatives in Singapore and spends SGD 600 shopping on Orchard road.

(iii) An Australian resident purchases a factory in Malaysia from a Singaporean resident

(iv) A Singaporean company pays dividends to its Australian shareholders

(v) An Australian resident receives income for services rendered in Singapore

(b) Review the table below:-

Provide an economic assessment of the data presented. In your answer refer to the economic significance of the various accounts in the balance of payments, the role of the central bank, international net debt, changes in foreign investment and changes in trade flows, savings, and investment differentials.

QUESTION 2

In the context of National Income Accounting and the Intertemporal model: Consider a country “smartville” with a closed economy real rate of interest of 3% while the prevailing world interest rate is 1.5%.

(i) Use the Metzler diagram as a framework to critically evaluate the likely outcomes for the “smartville” economy. In your answer refer to the current account balance, savings and investment, comparative advantage, and discuss how “smartville” might gain from opening up to trade with the rest of the world in this context.

QUESTION 3

Consider models of Exchange rate determination.

Assume interest parity holds and the return on a domestic asset is equal to the covered return on a foreign asset. In the domestic economy, the central bank decreases the interest rate in order to stimulate the economy.

Using both covered and uncovered interest parity conditions identify the direction variables would be expected to move in response to the policy changes in order to restore parity. What role do expectations play if any in this process?

QUESTION 4

Consider theories relating to exchange rate determination in the Long Run. The domestic central bank responds to the COVID 19 virus by increasing the money supply via quantitative easing measures.

(a) Applying the Dornbusch’s sticky price model and assuming the exchange rate is not managed directly by the central bank, explain the implications of the central bank actions on the spot exchange rate (e)

(i) in the short run

(ii) in the long run

(b) Applying the monetary model, explain the implications of the central bank action on the spot exchange rate

(c) What are the key differences in the monetary and Dornbusch models of exchange rate determination?

QUESTION 5

Consider the relationship between the exchange rate and the balance of payments. Examine the case of a small country in the import and export markets under the elasticity approach.

(a) Draw a separate graph for the import market and the export market illustrating the effect of a rise in e, on the foreign price of imports and exports and the quantities of imports and exports respectively.

(b) What can be determined about the effect on the trade balance from a rise in e as a result of your analysis in part (a)?

(c) If it is less than 100% pass-through how might this impact import expenditure?

(d) Assume a small economy is below full employment. Illustrate and explain how a reduction in the value of the domestic currency (rise in e) will impact on the trade balance under the absorption approach.

(e) Consider how you might model the impact of the COVID19 virus on a small economy initially at full employment. Discuss likely outcomes using the absorption model.

QUESTION 6

In the framework of the Swan model, assume that Singapore was achieving both internal and external balance, prior to the outbreak of COVID 19. Assume that Singapore faces a relatively inelastic IB schedule and a relatively elastic EB schedule.

(a) Illustrate a likely outcome of the COVID19 virus on both internal and external balance and mark Singapore’s current post virus position on a Swan Diagram as X.

(b) Briefly explain how and why an attempt to restore internal balance will disrupt the external balance

(c) What automatic mechanisms may help restore internal balance? How effective might these mechanisms be in the current economic situation brought on by the Covid19 virus?

(d) Following the recommended policy assignment rules, what policies should be put in place to restore general macroeconomic equilibrium

QUESTION 7

With reference to the IS-LM-BP analysis of a small economy like Ireland, answer the following questions and provide the required explanation and diagrams.

(a) Assuming Ireland trades predominantly within the eurozone has perfect capital mobility and a fixed exchange rate (Euro), examine the effect that an expansionary monetary policy put in place by the European central bank has for the domestic (Irish) economy.

(b) To counteract the negative effects of the COVID 19 virus on the domestic economy of a small open economy with a flexible exchange rate (such as New Zealand), would you recommend a fiscal or monetary policy response? Use the IS-LM BP model to support your answer

QUESTION 8

With reference to the IS-LM-BP analysis, answer the following questions and provide the required explanation and diagrams to support your analysis.

(a) Assume a country like the United Kingdom (UK) with high levels of capital mobility and a flexible exchange rate, puts in place an extensive expansionary monetary policy. Examine the likely effect that this policy has on the UK economy.

(b) How might an expansionary fiscal policy in the UK spill over to a smaller trading partner (for example the Republic of Ireland)? Illustrate and explain the macroeconomic interdependencies between the UK and Ireland. What other factors might impact the transmission of impacts between the two nations?

QUESTION 9

Consider a country with a fixed exchange rate. Assume there is initially macroeconomic equilibrium, there is no flow of assets/ capital internationally i.e. zero capital mobility. Then the Government undertakes an expansionary fiscal policy. Using the IS-LM-BP framework

(a) Illustrate the initial policy effect graphically.

(b) Due to the policy, what is the resulting disequilibrium?

(c) What action does the central bank need to undertake to maintain the fixed exchange rate?

(d) What is the net effect on Y as a result of the monetary expansion?

QUESTION 10

“A small open economy that relies heavily on trade with other nations is better positioned to adjust to external shocks if it has a floating/ flexible exchange rate mechanism” Discuss.

(a). In your answer consider automatic adjustment mechanisms.

(b). How might the current COVID 19 context impact on the adjustment process?