Global Financial Crisis on US

Assignment 1 (Individual Written Assignment – 10%)
Discuss the policies which a government can implement to achieve long-term economic growth. To what extent do you agree that economic growth is always beneficial to a country?
To address the above questions, you will need to support your discussion and view(s) by showing the evidence upon which they are based. Such evidence may include the economic policies of country (ies) chosen for illustration, what the governments have specifically done in order to achieve economic growth and the outcomes. Some of these evidences presented may be open to several interpretations; hence you should try to demonstrate why a particular argument is preferable to other interpretations in supporting your point of view.

Assignment 2 (Individual Written Assignment – 30%)

The Global Financial Crisis (GFC) which occurred in 2007 and 2008, is considered by many economists as the worst crisis the world has experienced since the Great Depression in the 1930s. From a financial crisis that started in the United States of America (USA), the crisis eventually led to an economic downturn not only in the United States but also in many other economies worldwide. As a result, many countries experienced a decline in production activities and an increase in the unemployment rate in the labor market.

As an Economist working for the World Bank, you have been tasked to conduct research on ONE country that has been affected by the GFC and write a report covering the following key areas:

•  Explanation on how the economy of the country chosen was affected by the GFC which started in the USA.
•  Impacts of the GFC on the economy and society.
•  Economic policies implemented by the Government in response to the crisis.
•  The outcome of the policies implemented and the possible constraints faced in the process.

SUMMER EXAMINATION – 2012

BACHELOR OF SCIENCE (SINGAPORE) 41 PART-TIME

ECON 2001S

Economic Policy and the Global Environment

Question 1
You have been invited to conduct a workshop for a group of Diploma students at your school on the topic of money and monetary policy that can be adopted by a Central Bank to manage an economy. You are to answer the following questions raised by the students.
b) Discuss the monetary policy tools which a central bank can use to stabilise an economy. (10 marks)
c) Explain how the monetary policy can keep the economy from becoming inflationary. Please use the AS/AD model and explain how the effect of the policy is transmitted to reduce the impact of inflation. (10 marks)
c) Identify and discuss two limitations of monetary policy. (5 marks)

Question 2
Singapore was adversely affected by the Global Financial Crisis which started in the United States of America (USA) in 2008. As a result, Singapore went into recession in the middle of 2008. Using the AD-AS model for illustration,
a) Discuss the view that the Singapore government should use fiscal policy to eliminate the recessionary gap in order to reduce unemployment. Please discuss both the supporting and opposing views. (10 marks)
b) Identify the supply-side policies which the government can consider implementing and discuss the likely effectiveness of implementing such policies in overcoming the recessionary economy. (15 marks)

Question 3
The simple economy of Zentoland is represented by the following model”
Consumption function: C = 2,510 + 0.4Yd
Investment function: I = 1,000
Government spending: G = 6,000
Net taxes : T = 5,000
Export : X = 6,000
Import : M = 4,000
Disposable income : Yd = Y – T
a) What is the equilibrium level of income (Y) of Santa Land? Make sure you present all your workings. (4 marks)
b) Draw the aggregate expenditures curve and indicate the equilibrium output. (4 marks)
c) Calculate the multipliers in this economy? Please show your working clearly. (3 marks)
d) Discuss the effect of an increase in autonomous Investment of $4,000 on the equilibrium income. (4 marks)
e) If $20,000 is the “full employment” level of income, and the government’s goal is full employment, by how much must government spending (G) increase in order for the economy to reach the ‘full employment’ level of income? (3 marks)
f) Instead of increasing government spending, the government decides to lower net taxes (T) to bring the economy to the “full employment” level of income of $20,000. By how much must net taxes (T) decrease in order for the government to achieve its goal? (3 marks)
g) Explain why there are differences in the size of the change in G and change in T in parts (c) and (d) to achieve the same ‘full employment” level of income.

Question 4
a) Many Economists in the United States of America believe that the Chinese renminbi is undervalued. The Chinese government, however, has maintained the view that her currency is not undervalued. Explain why the governments are sometimes concerned about the level of the exchange rate of their country’s currency with their major trade partner. (10 marks)

b) Using foreign exchange market diagrams analyze the effect on the exchange rate between Singapore dollars (SGD) and United States dollars (USD) when the following occurs.
i) The United States government decides to reduce tax on profit made by
foreign investors in the United States. (5 marks)
ii) The Singapore economy went through a strong recovery following the
recession in 2009, leading to a significant increase in imports from the USA. (5 marks)
iii) Speculators anticipate that the USD will fall in value relative to the SGD.
(5 marks)

Question 5
Explain the effect on the interest rate in the money market of Malaysia for each of the following situations below. Demonstrate your answer with the aid of suitable diagrams.
a) The Bank Negara (Central Bank of Malaysia) reduces the required reserve ratio of commercial banks by 2 percent. (5 marks)
b) The people have decided to hold more money at home as a result of several commercial banks closing down during the economic crisis. (5 marks)
c) The people invest in more bond funds as they expect the bond prices to rise in the near future. (5 marks)
d) The economy is experiencing a strong economic growth rate of 10% per annum. (5 marks)
e) Firms are expecting strong economic growth in the next six months. (5 marks)

Question 6
Draw aggregate demand and aggregate supply (AD-AS) diagrams for each of the following scenarios and identify in each case the impact on the price level and real GDP on the Singapore economy. Assume the economy begins with a full-employment level of real output and all other factors remain constant.
a) Export from Singapore has increased substantially following the recession in 2009. (5 marks)
b) Increase in productivity of the firms. (5 marks)
c) The Singapore population declines by half a million, as many young Singaporeans emigrate to Australia and Canada in the last two years. (5 marks)
d) The Singapore dollars appreciated against other major currencies. (5 marks)
e) More successful supply-side policies implemented by the Singapore government to improve the productivity of workers in the last five years. (5 marks)