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Assess the measures small and open economies such as Singapore should adopt to reduce inflation

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´╗┐Assess the measures small and open economies such as Singapore should adopt to reduce inflation The achievement of price stability is one of the key macroeconomic aims of the Singapore government. Price stability is achieved when low and stable inflation rates are achieved in the economy. Governments that have maintained inflation rate at below 5% can be said to have achieved price stability. Price stability is important in Singapore?s economy as it is the basis for sustainable growth in maintaining export competitiveness and providing a positive business environment. ...read more.


When Singapore?s trading partners expand rapidly, their national income and general price level will rise rapidly. When this happens, the prices of imported goods and services in Singapore, which include both consumer and intermediate goods in Singapore will also lead to high cost-push inflation. Further, the external demand for Singapore?s goods and services will increase rapidly which will lead to high demand-pull inflation in Singapore. Therefore, when the MAS predicts a strong external economic environment, it can raise the policy brand, within which the exchange rate of the Singapore dollar is maintained, gradually and modestly to allow a gradual and modest appreciation of the Singapore dollar to reduce imported inflation, cost-push and demand-pull inflation. ...read more.


Furthermore, given that bulk of Singapore?s imports are raw materials and necessities, since Singapore is resource scarce, demand for imports is expected to be relatively price inelastic. Hence, import expenditure would fall and this translates into lower cost of production for firms, increasing SRAS and helps reduce inflationary pressure. However, the stronger Singapore dollar will lead to lower economic growth and higher cyclical unemployment. Further, although exchange rate policy can be used to reduce inflation in Singapore in the short-run, it is ineffective for reducing inflation in Singapore the in the long run because it will not lead to an increase in the productive capacity of the economy. ...read more.

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