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Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus
Monetary Policy and its Effectiveness

Outcome
Explain monetary policy in a broader international context where interest rates and exchange rates are alternative instruments
Explain the external and domestic effects of changes in exchange rates and interest rates
Evaluate the effectiveness of monetary policy in achieving macroeconomic aims.

Macroeconomics Lecture 16 : Monetary Policy 2

16.1 Limitations of monetary policy

• Confidence (or lack of)

• If interest rate is high enough, borrower and spending will be deterred. But in times of an economic boom, businesses and households are very optimistic and hence high interest rate may not deter borrowing and spending. Instead, high interest rate may cause other macroeconomic problems (e.g. rapid appreciation of the currency) and lead to conflict with other objectives of government policy.

• On the other hand, low interest rates are not likely to be very effective as a stimulant when the economy is depressed. Borrowing and spending by firms are not likely to be encouraged when new investment offers little or no prospect of reasonable profits. When there is high unemployment, lower interest charges are not likely to lead to any significant increase in hire purchase borrowing in the markets for consumer goods.

• Liquidity Trap

When levels of interest rates are already very low such that any surplus money is simply channeled to idle balances. Hence interest rates also remain unchanged. With interest rates being stagnant despite the rise in money supply, investment, consumption and hence AD would also not increase.

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Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus
Supply Side Policy and its Effectiveness

Outcome
Explain supply side policies.
Analyse the effects of supply side policies on the economy.
Evaluate the effectiveness of supply side policies in achieving macroeconomic aims.

Macroeconomics Lecture 17 : Supply Side Policies

17.1 Definition

Supply-side policies are government policies designed to affect Aggregate Supply (AS) directly, specifically policies to reduce costs or raise productivity. They are also to minimize friction in markets and to improve information flow. It seeks to achieve economic gains by long-term measures designed to raise the rate of economic growth by shifting the long run AS curve to the right rather than manipulating AD.

(a) Reducing Government Expenditure – Release More Resources to the Private Sector

A more efficient use of resources within the public sector and a reduction in the size of the sector can allow private investment to increase with no overall rise in AD. Thus the supply-side benefits of higher investment could be achieved without the demand-side costs of higher inflation.

Grants and subsidies are reduced. When subsidies are reduced, many nationalized industries will increase their prices and reduce their costs since their objective is to maximize profits. However, these policies are not without problems. In some sectors, the effect may be to cut services rather than increase efficiency. Since it may be easier to reduce long term capital expenditure (e.g. for developmental purposes) than recurrent expenditure (e.g. wages), there may be a sharp decline in new roads, schools etc.

(b) Reducing Taxes to raise work incentive

One way to encourage savings is to reduce personal income tax rates and shift the emphasis to taxes on consumption so that any income saved is subject to minimal income taxes.

Supply-side advocates also claim that high taxes discourage work. Hence, to encourage people to work (thereby shifting the AS to the right), income taxes should be lowered.

Business income is taxed firstly as the income of firms when it is earned and secondly as income of households when it is paid out as dividends. Income taxes reduce business profits and lower the return to investing in company shares. Thus, households will be discouraged from investing in businesses thus limiting the growth of firms which in turn limits economic growth.

! Stop and Think : How has Singapore adjusted its corporate and income tax rates over the last ten years?
Corporate tax in Singapore has reduced from 25.5% in 2001 to 17% in 2010.
Personal Income tax rate for those in the highest income bracket (taxable income exceeding S$320k has reduced from 22% in 2003 to 20% currently (since 2007). Even those in the lower taxable income bracket i.e. more than S$20,000, the tax rate has reduced from 4% to 2% in the same period.

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A-Level Economics Tuition Singapore/H2/H1 Economics Tuition

Lesson Plan for JC1 H1/H2 on 24th May 2014

Market Failure Part 1

1. Introduction and Definitions

a) Market failure: A situation where resource allocation concerning what, how, for whom and how much to produce based on the market mechanism fails to achieve efficiency or equity among various income groups or both.

b) Partial Market Failure: Describes a situation whereby resource allocation through market forces alone results in a level of production that is less than or more than that which is deemed socially desirable

c) Complete Market Failure: Describes a situation whereby resource allocation through market forces alone results in zero production of the good or service.

d) Concept Map to Link (a) to (c)

e) Economic efficiency is achieved when society has already allocated resources in such a way that it is not possible to change the existing resource allocation to make someone better off without making someone else worse off. When economic efficiency is achieved, we say that society’s welfare has been maximized.

f) To achieve economic efficiency, society needs to achieve allocative and productive efficiency.

g) Allocative efficiency is achieved when the right amount of goods and
services are produced from society’s point of view. There is no under or over production. This is achieved when a firm produces a level of output up to the point where Marginal Social Benefit (MSB) gained on the last unit by society equals to the Marginal Social Cost (MSC) of producing that last unit of output.

In other words, MSB = MSC

h) MSB is the total benefits to society as a result of the consumption of an additional unit of good. MSB is the summation of marginal private benefit (MPB) and marginal external benefit (MEB).

i) MSC is the total costs to society as a result of the consumption or production of an additional unit of good. MSC is the summation of marginal private cost (MPC) and marginal external cost (MEC).

j) Concept Map and Equation for linking (g) to (i)

k) Demand and supply diagram to illustrate allocative efficiency.

l) Underproduction (MSB > MSC)

m) Overproduction (MSB < MSC)

n) Productive efficiency is achieved when all the firms in all industries use the least-cost or best combination of inputs to produce a given level of output. At any given level of output, the average cost of production cannot be lowered any further in the long run. This implies there is no wastage of resources. In order to achieve this, a firm must produce along any point on the LRAC.

o) Concept map to link everything.

p) Why do markets fail?

i. The price mechanism is based on self-interest of consumers and
profit motive of producers.

2. Types/Causes/Forms of Market Failures

a) Partial Market Failure due to negative externality in production
i. Definition of externality

Externality is a third party effect on someone not directly involved in
production and/or consumption of a good/service. These third parties
are not compensated for the damages inflicted on them.

ii. Definition of negative externality

Negative externality is a third party cost or adverse effect on
someone not directly involved the production and/or consumption of
a good/service. These third parties are not compensated for the
damages inflicted on them.

iii. Example of negative externality

 Release of toxic materials from a factory upstream into the
river. This results in a decrease of catch by downstream
fisherman and hence the income of these fisherman. iv. Important Concepts for discussing negative externality
 MSC
 MPC = Costs that firm incurs in producing an additional unit of
output. Examples include wages, rental, and cost of raw
materials and implicit costs.
 MEC = Costs incurred by third parties and not compensated
from an additional unit of output.
 Equation

v. Intuitive Ideas and Story Based Discussion

 To begin with let us consider the producer side.
 In a free market without government, a producer pursues his
self-interest of maximizing profits.
 Thus he only takes into account his private costs.
 Suppose the firm produces chemical products. The private
cost in this case would comprise the cost of labour, raw
materials and capital equipment for producing the chemicals.
 Next, let us move on to consumer side.
 A consumer is willing and able to pay only on the basis of the
satisfaction he can obtain from the chemicals. This satisfaction
is the private benefit he derives from the consumption of the
good.
 In a free market without government, the producer will
manufacture chemicals up to the point where his profits are
maximized and may pollute the environment.
 The pollution will then give rise to third party costs known as
external cost or negative externalities. The example of these
external costs can manifest in the form of negative health
effects and the medical bills incurred. Most importantly, these
costs are not reflected in the financial accounting record of
the firm.
 Thus the true cost or social cost or total cost of the production
is underestimated.
 If the social cost is underestimated, that means from a
society’s point of view, resource allocation alone will result in
overproduction of the chemical.
 Overproduction violates the concept of allocative efficiency,
and this in turn violates the concept of efficiency and thus
causes market failure.  In short, social welfare is not maximized or there is welfare loss.

vi. Putting everything into a graph (COPY ON ROUGH PAPER PLEASE!)
 Graph with correct labels and annotations
 Assumptions
 No positive externality
 Firms operate in perfect markets with no government intervention
 Keywords
 Divergence
 Private equilibrium
 Social Equilibrium
 Overproduction
 Allocative inefficiency
 Total deadweight loss
 Market Failure

vii. Government Policies to correct negative externalities
 Taxes
 Policy Statement = Government could impose a tax on
production that is equal to the marginal external cost at
the last unit of output determined by MPB = MPC.
 Impact on graphs
 Analysis Keyword = internalize the external cost
 Examples = Road taxes pegged to engine capacity to
encourage the use of fuel efficient vehicles.
 Merits and Limitations
 Market forces are allowed to operate and consumer
sovereignty is protected
 Incentive to reduce pollution
 Incidence of tax and price elasticity
 Production levels and price elasticity
 Lack of knowledge on damages from pollution
 Manpower costs to assess collect and enforce the tax.

TO BE CONTUNUED NEXT LESSON!
 Rules and Regulation
 Tradeable Pollution Permits

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A-Level Economics Tuition Singapore/H2/H1 Economics Tuition

Date : 3 July 2014

Topic 2.2 Macroeconomic Aims, Problems/Issues, Consequences and Policies

Syllabus

Macroeconomic Problems and their Causes
• Undesirable rates of economic growth
• High inflation rate
• High unemployment rate
• Persistent or large balance of payments deficit

Outcome
• Explain the meaning of undesirable rates of economic growth, high inflation rate, high unemployment rate and persistent or large balance of payments deficit.
• Analyse the causes and consequence of macroeconomic problems.

Macroeconomics Lecture 1 : Undesirable Rates of Economic Growth

1.1 Recap : Economic Growth

Economic Growth is the increase in an economy’s level of real output over time.

Rate of Economic Growth is the percentage increase in national output over a 12-month period.

Aim of governments : High and sustained rates of economic growth.

Reason : To advance the standard of living of the people.

4.2 Recap : Actual Growth Vs Potential Growth

Actual economic growth is the annual percentage increase in national output i.e. the rate of growth in actual output. Published statistics on growth rates (such as that in Table 1) are examples of actual economic growth.

Potential economic growth is the speed at which the economy could grow. It is the annual percentage increase in the capacity (potential) of the economy to produce or develop i.e. the rate of growth in potential output.

Potential economic growth may be achieved by :

• Increase in the quantity of available resources such as labour, land, capital and entrepreneurship.

• Improvement in the quality of the available resources.

Actual and Potential Growth may be illustrated by 2 models :
• PPC
• AD/AS

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Microeconomics Revision 2 : Demand, Supply and the Market Part 1

Syllabus Content :
• The individual and market demand curves as representations of intentions to consume.
• The firm and market supply curves as representations of intentions to consume.
• Changes in demand and supply.
• Shifts vs movements in demand and supply.
• Equilibrium price and quantity

Learning Outcome :
• Explain that demand reflects consumers’ satisfaction and recognize the inverse relationship between price and quantity demanded.
• Explain that supply reflects opportunity costs and recognize the direct relationship between price and quantity supplied.
• Discuss the factors affecting demand and supply and the implications of the ceteris paribus condition.
• Differentiate between shift and movements along the demand and supply curves.
• Explain the determination of market equilibrium price and quantity through the interaction of demand and supply.
• Analyse the effects of changes in demand and supply on equilibrium price and output.

Content Quiz :

1. List the main influences on demand for a good.
2. List the main influences on supply of a good.
3. Define demand.
Demand is a relationship indicating the quantity of a well-defined good (or service) that consumers are both willing and able to buy at each possible price during a given period of time, ceteris paribus. It is sometimes known as Effective Demand, or a desire backed by purchasing power.
4. Define supply.
Supply is a relationship indicating the quantity of a well-defined good (or service) that producers are both willing and able to put up for sale at each possible price during a given period of time, ceteris paribus.
5. What does the law of demand say?
The law of demand states that in a given time period, the quantity demanded of a good (or service) is inversely related to its price, ceteris paribus.
6. Why do consumers demand less of a good when its price increases?
Consumers demand less of a good (or service) when price increases because of 2 reasons :

• People will feel poorer. They will not be able to afford to buy so much of the good with their money. The purchasing power of their income has fallen. This is called the income effect of a price rise.
• The good will now be more expensive relative to other goods. People will thus switch to alternative or “substitute” goods. This is called the substitution effect of a price rise.

7. What does the law of supply say?
The law of supply states that in a given time period, the quantity supplied of a good (or service) is directly related to its price, ceteris paribus.
 
8. Why do suppliers supply more of a good when its price increases?
Producers/Firms supply more of a good (or service) when price increases because of 3 reasons :

• As firms supply more, they are likely to find that beyond a certain level of output, costs rise more and more rapidly. Only if the price rises will it be worth producing more and incurring these higher costs.
• The higher the price of the good, the more profitable it becomes to produce. Firms will thus be encouraged to produce more of it by switching from the production of less profitable goods.
• Given time, if the price of a good remains high, new producers will be encouraged to set up in production assuming there are no barriers to entry. Total market supply thus rises.

9. What is the link between individual demand/supply and market demand/supply?
Horizontal summation
10. What is the difference between change in quantity demanded/supplied and change in demand/supply? Draw diagrams to illustrate.

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General Tips for Writing Essay on “Which Goal is the most important?”

I) Framework = S + C + C

A) S = Severity of the problem
You need to write on two things:
i) Which goal is currently in the biggest trouble?
ii) What are the negative consequences if left unresolved? OR What
are the benefits of resolving the problem and achieving that goal?

B) C = Conflict with other goals
You need to write on one thing:
i) How does focusing on goal X lead to conflict with goal Y?

C) C = Characteristics/Conditions a country faces
You need to write on one thing:
i) How does focusing on goal X lead to achievement of goal Y?

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J1 H2 SAT 7.30pm – 9.30pm

J1 H1 SAT 7.30pm – 9.30pm

J2 H2 SAT 9am – 11am

J2 H2 SAT 5.30pm – 7.30pm

J2 H1 SAT 5.30pm – 7.30pm

J2 H2 SUN 9am – 11am

J2 H1 SUN 9am – 11am

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Guided Revision Test + Notes

Contents = Circular Flow of Income, PMI-ADAS-K, FP, MP and SSP

Section 1: Explanation Recall/Definitions

1) Explain briefly without definitions how each of the following factors affect
consumption
I) Government providing subsidies for parents on child care
II) Economic boom
III) Central bank increases interest rates
IV) Expectation of future inflation

2) Construct (USING PENCIL) the crude mechanism for the transmission of
Expansionary Fiscal Policy during a recession and a period of rising unemployment. In your diagram, indicate the limitations the policy may potentially face.

3) Construct (USING PENCIL) the crude mechanism for the transmission of Expansionary Monetary Policy during a recession and a period of rising unemployment. In your diagram, indicate the limitations the policy may potentially face.

4) In the balance of payments, if the sum of ________ items exceeds ______ items, the total currency inflow will exceed outflow, resulting in balance of payments _________.

5) In the balance of payments, if the sum of __________ items exceeds _______ items, the total currency outflow will exceed inflow, resulting in balance of payments _________.

6) Define circular flow of income and provide a diagram.

The circular flow of income illustrates the flow of ________ from households to
firms in return for the ________ that firms supply and the flow of __________ from firms to households in return for the _________ services that households supply.

Changes in circular flow of income are triggered by changes in injections and withdrawals. Injections are _________ to the circular flow of income which does not come from the expenditure of __________ _____________. Injections are ______________________________, _______________ ______________ and __________ ____________.

Withdrawals are any part of income that is not passed on within the circular flow of income.

Withdrawals include ___________, _____________ and ____________.

Diagram =

7) Further elaborate on the diagram circular flow of income. [Needed for all essays on circular flow]

Households supply their _________ of production in return for payments in the form of rent for land, ________ for labor, interests for ______ and _______ for their entrepreneurship. In addition, households also pay for goods and services produced by firms in the form of __________ expenditure. Households also receive help from __________ in the form of G, save some of the ________ they earn (S), pay ______ to the government and spend some on __________ goods (M).
Firms supply goods and services to households in return for household __________, which also become the _________ receipt for firms. Firms may also earn ______________ from selling exports to foreigners, or invest in new machinery in the form of __________ expenditure (I), receive subsidies from ____________ (G) and pay _______ (T) to government.In an economy, the equilibrium national income is achieved when the sum of ___________ from the circular flow of income is equal to the sum of ____________
into the circular flow of income. The mathematical expression for this is ___________________ = _______________.

8) Explain briefly what happens to circular flow of income of Singapore during a global financial crisis

P: The size of the circular flow of income will __________.

E/E: During a global financial crisis, there is a fall in global household income, causing the level of injections such as I and X to fall, thus Singapore’s national income is no longer in equilibrium because ___________________ > _________________.

The level of investment expenditure fell due to ___________ outlook by firms as
lower profitability of investment projects is expected during the global recession. In addition, banks are unwilling to lend during the financial crisis for fear of high ________ risks. Thus firms are unable to finance their investment projects, leading to fall in I.

The global recession leads to lower income and lower purchasing power for foreign households. Thus, the demand for Singapore’s exports fall, resulting in lower _______ __________ for the country.

During an economic recession, the Singapore government is likely to conduct an _____________ fiscal policy so that G will _________ .

However, the fall in I and X will more than offset the _________ in G. This is due to Singapore’s high trade dependence whereby X-M amounted to _______ of
Singapore’s GDP.

With the overall fall in injections, the firms output will decrease. The _______ demand for factors of production from _________ will decrease and according to the circular flow of income model, the __________ ___________ flowing back to households will _________, resulting in a fall in the size of the circular flow of income. With a lower income and purchasing power, households will cut ____________ __________ accordingly. At the same time, households will also _______ less, pay less __________ and spend less on _______ goods. The size of __________ will also fall.

With the fall in ____________ _____________ by households, firms will again
respond by decreasing _________. The process repeats and stops when the _______
fall in ________ is equal to the total fall in ____________.

L: Eventually the size of the circular flow of income decreases.

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Test on Scarcity, Choice and Opportunity Cost
Notes on Demand, Supply and Price Mechanism

Section 1: Definitions (Improves ability to write introduction for essay questions)

a) Define scarcity
Scarcity arises because of __________ __________ and __________ wants. ___________ are ___________ because the world has a finite amount of them. __________ wants refer to the desire for ever higher levels of ____________ once a particular level of demand is met

b) Define choice
Choice refers to the act of _________ among ____________ and it involves sacrifices known as _________________ ____________. In making choices, the four most fundamental problems an economy must resolve are:

i. _________ to produce
ii. __________ ____________ to produce
iii. __________ to produce
iv. ________ _________ to produce

c) Production possibility curve is a curve which shows all the possible _____________ of two goods that a country can produce within a specified period of time with all its resources fully and __________ employed and at a given state of __________.

d) Define opportunity cost
Opportunity cost of any action refers to the next best ___________ foregone. It represents the real cost of that activity

e) A movement onto a PPC is due to an economy recovering from a ____________

f) An outward shift of PPC away from the origin is due to any of these:
i. Improvement in _________ of ____________
ii. Increase in ___________ of __________
iii. Improvement in ______________ of _____________
iv. Free __________ according to comparative advantage.

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Surprise Test: Demand and Supply

Notes: Factors affecting Demand, Supply and Price Mechanism

Section 1: Simple Recall/Definitions Questions

a) State the four types of factors essential for every production process

b) State other interchangeable words for factors of production

c) Define demand
Demand refers to the quantities of a product that buyers are __________ and _________ to buy at various prices per period of time, _________ paribus

d) State the law of demand
The law of demand states that ceteris paribus, the ________ the price of a good, the lower the quantity demanded of a good. This implies an ___________ relationship between the price and quantity demanded for a good.

e) Define supply
Supply refers to the quantities of a product that sellers are _____________ and
_____________ to produce at various prices per period of time, ___________ paribus.

f) State the law of supply
The law of supply states that ceteris paribus, the higher the price of a good, the greater the quantity supplied of the good. This implies a _____________ relationship between price and quantity supplied of a good.

g) Define complements and state 2 examples

h) Define complementary demand

i) Define substitutes and state 2 examples

j) Define competitive demand

k) State 3 determinants of demand

l) State 3 determinants of supply

m) State how equilibrium prices are determined in a free market

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Surprise Test: Demand, Supply and Price Mechanism

Notes: Government Intervention

Section A: Simple Recall/Definitions

a) Define choice
Choice refers to the act of _________ among ____________ and it involves sacrifices
known as _________________ ____________. In making choices, the four most
fundamental problems an economy must resolve are:

i. _________ to produce

ii. __________ ____________ to produce

iii. __________ to produce

iv. __________ _____________ to produce

b) Define demand
Demand refers to the quantities of a product that buyers are __________ and _________ to buy at various prices per period of time, _________ paribus

c) Define Supply
Supply refers to the quantities of a product that sellers are _____________ and
_____________ to produce at various prices per period of time, ___________ paribus.

d) State 5 determinants of demand

e) State 5 determinants of supply

f) Define complements and substitutes
Complements refer to two goods that must be __________ ___________ to satisfy the same want.
Substitutes refer to two goods that __________ with each other to satisfy the same want.

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JC1 Promo Exams and JC2 Prelim Exams Preparatory Classes

for Economics.

Open for Registration Now!

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A-Level Economics Tuition Singapore/H2/H1 Economics Tuition

Hi All A-Level Economics Tuition Students

Macroeconomics Revision 4 : Trade and Globalisation

Syllabus :
Free Trade and its Benefits
Free Trade and barriers to trade
Globalisation and its impact

Outcome :
Explain the basis for trade using the concept of opportunity cost.
Explain the benefits of free trade.
Explain why protectionism exists
Examine the impact of globalization on the Singapore economy
Explain the trend towards globalization and discuss how economic globalization impacts on trade in goods and services and foreign direct investment with respect to the Singapore economy

1. Define Trade

2. List the reasons for trade.

3. List the benefits of trade

4. What are the disadvantages of trade?

5. Why does protectionism exist?

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Essay

The price of organic fertilizers for organic crops has been rising. Rising income and healthy living campaigns are encouraging households to switch to consuming organic food.

With reference to the above events, assess the relevance of different concepts of elasticities of demand in explaining the effects on expenditure by consumers on organic and non-organic food. [25]

Suggested formats

Introduction
Focus: Discuss the relevance of PED, YED & XED in affecting CE in each market given a rise in the price of organic fertilizers, a rise in income and healthy living campaigns.

Key Definitions:

-Consumer expenditure (CE): Total amount of money that consumers spend on a product.[CE = P x Q]
-PED: Measures the degree of responsiveness of quantity demanded to a change in the price of the good itself, ceteris paribus.
-YED: Measures the degree of responsiveness of demand of a good given a change in income, ceteris paribus.
-XED: Measures the degree of responsiveness of demand of a good to a change in the price of another good B (substitutes / complements), ceteris paribus.

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