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How is Singapore affected by the global recession? Singapores economy is open and vulnerable to external shocks.

As such, events happening beyond Singapores borders can severely affect Singapores economic health and stability. During the global recession, interest rates tend to decrease, as the decrease in demand for borrowing pushes it downward. As Singapore is a price taker in interest rate, where the domestic interest rate level is influenced by interest rate trends in regional and the worlds major financial markets such as US, China and London, her interest rates are forced to decrease in a bid to revive spending in the economy. Although this will encourage spending and investments, there are people who still lack the confidence to take up loans as they fear that their investments will not pay off. Furthermore, qualifying standards for applying for a loan will increase, as banks want to ensure that they are able to get back their moneys worth should one not repay his/her loans. Singapores GDP is heavily reliant on net exports, where exports make up a large percentage of the countrys GDP. Thus, the fall in demand for Singapores exports resulted in a considerable fall in Singapores GDP. Countries that normally purchase exports from Singapore such as Hong Kong, USA and Malaysia start to purchase less. Thus, demand for Singapore exports begin to fall, resulting in a fall in net exports, thus causing aggregate demand (AD) to decrease, causing an eventual fall in National Income (NY) and GDP. Singapores economy can be affected by a rise in unemployment rate as a result of the global recession. Manufacturing industries and foreign firms, upon experiencing a fall in demand for their goods, will begin to cut back on employment as these firms start decreasing production. Thus, unemployment rate will increase considerably. This will cause GDP to fall, as the unemployed and people fearing unemployment will consume less and save more, resulting in a fall in AD and thus NY and GDP. Cost-Push Inflation can also occur in Singapore due to the global recession. During the recession, costs of goods can go up due to rising costs of production (due to increase in price of raw materials), causing the affordability of workers to decrease, resulting in them demanding for higher salary. This causes companies to either retrench workers or increase their salaries and costs of production at the same time, causing product prices to rise yet again, creating an inflationary spiral. The rise in inflation may cause firms to end up retrenching workers and people to favour assets over money, causing currency to depreciate and Singapores economy to become sluggish. In my opinion, the largest impact on Singapores economy is the fall in exports. Singapores economy is so heavily reliant on exports that any dip can be heavily felt throughout the economy. Singapores lack of domestic demand means that all production has to be sold overseas If produced goods are not bought by overseas firms and governments, the produced goods w ill not be sold, leading to a supply surplus, causing firms to produce less and thereby employ lesser people (as fewer people are required to produce lesser goods). This will cause the whole economy to shrink. A rise in unemployment will not affect Singapore that badly as these people can always go for work retraining in order to increase job availabilities (which the Singapore government actively supports). Interest rates and inflation can also be controlled by the Singapore government as it is a localised problem. Thus, the greatest setback Singapore will face during the recession is the fall in net exports.

Economics Monetary and Fiscal Polices Monetary policy is the manipulation money variables such as money supply, interest rate and exchange rate to attain macroeconomic objectives such as low inflation, healthy balance of payments and full employment Policies used include reducing interest rates and currency rate depreciation. Fiscal policy on the other hand is the use of government spending and taxation to achieve macroeconomic policy objectives as mentioned above. The first monetary policy is reducing interest rates. By reducing interest rates, the rate of return to saving is lowered, encouraging spending rather than saving. Households are encourage d to borrow more as cost of borrowing decreases. People will spend more, since greater amount to spend is available as they spend less on loans. Additionally, firms increase investments as a result of falling interest rates. The lower cost of borrowing reduces the cost of borrowing capital for investment, increasing the expected return. Furthermore, if demand for exports and imports are price elastic, net exports and aggregate demand (AD) will rise when the countrys currency depreciates due to hot money flowing out of the country. However, the effect of falling interest rate varies, depending on consumer and business outlook and confidence. If level of confidence is low, a low interest rate will not encourage much spending or increased borrowing as firms profits are falling and consumers are receiving lower wages and bonuses. The second monetary policy is currency depreciation. By buying foreign currency and selling the domestic currency, the supply of local currency will increase, causing the value of the currency to drop. This will cause export price in foreign currency to fall and import price in domestic currency to rise. This will make exports more competitive as compared to other countries, encouraging people to purchase the countrys export. Thus if exports and imports is price elastic, actual growth can be stimulated as net exports increase, thus increasing AD. However such a policy is risky, as output and employment can instead fall if demand for exports and imports is price inelastic. Fiscal policy involves the government intervening, where the government can employ expansionary fiscal policies, where the government undertakes a budget deficit by reducing taxes and increasing government expenditure. By reducing personal taxes, people will have more disposable income and thus consume more, thus increasing AD . Reducing corporate tax increases the companys after tax profits, encouraging them to raise the level of investment in the economy. By increasing government expenditure in public projects, people will be employed and contracts will be issued to firms who undertake the projects, thus stimulating the economy and increasing AD (consumption increase due to more people being employed, firms investment increases). However, tax benefits may not always bring about this desired increased as pessimistic households and firms will not consume or spend more if the business outlook is gloomy. The government might also be unable to finance such public projects.

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