Question

(a) Use graphs to show what happens to the demand for and supply of U.S. dollars in Singapore's foreign exchange market in each of the following cases. Then, indicate how the value of the Singapore's dollar would be change (depreciation, appreciation or no change).

(i) Singapore's real income rises.

(ii) United States' real income rises.

(iii) Singapore's inflation rises relative to United States' inflation.

(iv) Singapore's interest rates rise relative to United States' interest rates.

(b)What is the difference between a closed economy and an open economy?

(c)Because of the upcoming elections, the Prime Minister is concerned that the

Real GDP (or Real Income) is too low. The Prime Minister suggests the use fiscal policy to increase economic growth. However, the Committee of Economic Advisors warns the Prime Minister that such measures could crowd out private investment because of the high interest rates. The Prime Minister decides to negotiate with the Central Bank to resolve this problem. Describe a policy mix that will increase output, while keeping the interest rate at its original level.