What this lesson teaches
I can explain why governments use policy to raise living standards.
Syllabus 9570, 3.2.3(a). Macroeconomic Policies: Macroeconomic policy decisions undertaken by governments to achieve macroeconomic objectives in relation to living standards
Make a guess
Imported energy prices surge, and some low-income households struggle. Which mix suits Singapore best?
- A stronger S$ plus targeted help for low-income households.
- Cut interest rates so households can borrow to pay their bills.
- A broad rise in government spending for everyone.
Show the answer
A stronger S$ plus targeted help for low-income households.
Appreciation cuts the S$ price of imports, easing inflation. Targeted help protects the vulnerable without adding much to overall demand.
Use different tools for different problems: targeted help now, demand support if there is spare capacity, and supply-side policies for the long run.
Most economic problems have several causes, so governments often use a mix of policies.
Each tool should have a clear job. Targeted transfers protect vulnerable households. Demand management stabilises spending when there is spare capacity. Supply-side policies tackle lasting constraints.
More policies are not automatically better. Tools can work against each other, for example if fiscal stimulus adds to inflation that monetary policy is trying to reduce.
Singapore typically combines exchange rate policy for price stability, targeted fiscal support and long-run supply-side policies.
- Principle
- One tool for each cause.
Worked example: Responding to an energy price shock
Imported energy costs rise, pushing up prices. Some low-income households struggle to afford essentials. Many firms use energy inefficiently.
- Now: targeted transfers to protect low-income households.
- Now: exchange rate appreciation to ease imported inflation.
- Over time: grants for energy-efficient equipment, a supply-side measure that lowers costs.
- Avoid a broad spending boost, which would add to inflation.
Watch out for this
Using more policies at once always works better.
Policies can conflict. Each should target a specific cause.
Check your understanding
Singapore faces imported inflation, and MAS steepens the S$NEER slope. Why add targeted help for lower-income households rather than cash for everyone?
- Cash for each household would bring inflation down faster, because incomes rise.
- Targeted help lowers import prices directly, in the same way that a stronger S$ does.
- It eases hardship where prices bite hardest, without adding much to demand.
Show the answer
It eases hardship where prices bite hardest, without adding much to demand.
Right. Lower-income households spend more of their income on food and energy. Targeted help protects them while keeping extra spending, and so demand-pull pressure, small.