Question 1

[The 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.]

(a) [We learnt in class that fiscal policy measures mainly work through the Aggregate Demand side of the economy in the short run. Discuss two macroeconomic effects that affect the size and the direction of the shift in Aggregate Demand (50 words total). Provide a diagram to illustrate these effects. (4 marks)]

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(b) Suppose that a countrys household saving rate (savings as % of GDP) increased from 54% in 2019 to 55% in 2020. Explain whether this would strengthen or weaken the size of the economys fiscal policy multiplier or leave it unchanged, and the reasons why? (50 words total) Next, use these figures presented in (b) to calculate the value of multiplier for 2020. Present your calculation formula and all of your working. Write a clear sentence explaining how to interpret the final number. (4 marks)]

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(c) [Suppose the Singapore Government implements a fiscal stimulus package, through an increase in government spending worth $120 billion in 2020. Using the information presented in part (b) of this question, calculate your forecast of the overall impact of the governments stimulus package once the full effects are circulated throughout the economy. Be sure to show all your working and calculation formula. You can round off the value of the multiplier to 2 decimal places, and present your final answer rounded off to 2 decimal places. Write a clear sentence explaining how to interpret this final number. (2 marks) ]

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