Essay On Production Consumption And Exchange
The view that Singapore has few policies to deal with an external shock can be discussed with reference to the effectiveness of monetary policy, fiscal policy, exchange rate policy and short-term supply-side policies in Singapore.
An external demand shock will lead to a decrease in national output and hence national income.
Fiscal policy is a demand-side policy that is used to control government expenditure or taxation to influence aggregate demand.
To deal with an external demand shock, the government can increase expenditure on goods and services.
For example, the 2008-2009 Global Financial Crisis caused by the Subprime Mortgage Crisis in the United States led to a substantial fall in exports in Singapore.Therefore, the initial decrease in aggregate demand due to the decrease in exports will lead to decreases in consumption expenditure and hence further decreases in aggregate demand resulting in a larger decrease in national output and hence national income.This is commonly known as the reverse multiplier effect.When this happens, firms will employ even less factor inputs from households and hence will pay them even less factor income.The further decrease in households’ income will induce them to further decrease consumption expenditure resulting in a further decrease in aggregate demand.In the above diagram, a decrease in aggregate supply (AS) from AS which leads to a rise in unemployment, the general consensus is that the adverse effects of high inflation are more severe than those of high unemployment.Although fiscal policy can be used to deal with an external shock in large economies, it is ineffective in Singapore. An external shock is an unexpected external economic event that has undesirable effects on the economy.There are two types of external shocks: external demand shock and external supply shock.An external supply shock will lead to a rise in the general price level resulting in higher inflation.An external supply shock occurs when an unexpected external economic event leads to a substantial rise in the cost of production in the economy resulting in a large decrease in aggregate supply.