Trade Partner

Question 1

a) Many Economists in the United States of America believe that the Chinese renminbi is undervalued. The Chinese government however, has maintained the view that her currency is not undervalued. Explain why the governments are sometimes concerned about the level of exchange rate of their country’s currency with their major trade partner. (10 marks)

b) Using foreign exchange market diagrams analyse the effect on the exchange rate between Singapore dollars (SGD) and United States dollars (USD) when the following occurs.
i) The United States government decides to reduce tax on profit made by
foreign investors in the United States. (5 marks)
ii) The Singapore economy went through a strong recovery following the
recession in 2009, leading to significant increase in imports from USA. (5 marks)
iii) Speculators anticipate that the USD will fall in value relative to the SGD.

Question 2

You have been invited to conduct a workshop for a group of Diploma students at your school on the topic of money and monetary policy that can be adopted by a Central Bank to manage an economy. You are to answer the following questions raised by the students.
b) Discuss the monetary policy tools which a central bank can use to stabilise an economy. (10 marks)
c) Explain how the monetary policy can keep the economy from becoming inflationary. Please use the AS/AD model and explain how the effect of the policy is transmitted to reduce the impact of inflation. (10 marks)
c) Identify and discuss two limitations of monetary policy. (5 marks)