Question 1

[Singapore government has taken various fiscal policy measures to manage the economic impacts of the COVID-19 pandemic and support the economy through the pandemic-induced recession.]

1. [We learnt in the class that fiscal policy measures mainly work through aggregate demand side of the economy in the short run. Discuss two macroeconomic effects that can make the size of the shift in aggregate demand differ from the initial fiscal expansion. Explain in words (120 or less) and illustrate using a diagram (4 marks)]

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2. [What is the main macroeconomic variable that can affect the size of the multiplier and how? (explain in 100 or less words). Suppose household saving rate (savings as % of GDP) has increased from 54% in 2019 to 55% in 2020. How would this affect the size of the multiplier effect (strengthen or weaken) and why? (2+2 = 4 marks)]

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c) [Using information available in Part (b), calculate the value of multiplier (for 2020). Suppose the Singapore government had undertaken fiscal stimulus package (assume it as increase in government spending) worth $120 billion in 2020. Calculate your forecast of the overall impact of the governments stimulus package once the full effects are circulated throughout the economy. Write a clear sentence explaining how to interpret this final number. (2 marks) ]

[You can use the value of multiplier rounded off to 2 decimal places, and present your final answer also rounded off to 2 decimal places. Be sure to show all your working.]

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