A-Level Economics 2 — Questions and Answers
Question 1: Why is Singapore particularly vulnerable to imported inflation?
- Because Singapore exports too much
- Because Singapore is heavily dependent on imports for food, energy, and raw materials, so global price increases directly affect domestic prices (Correct answer)
- Because Singapore prints too much money
- Because Singapore has no central bank
Correct answer: Because Singapore is heavily dependent on imports for food, energy, and raw materials, so global price increases directly affect domestic prices
Singapore imports virtually all its food, energy, and raw materials. When global commodity prices rise, these costs are passed through to domestic consumers, making Singapore highly susceptible to imported inflation.
Question 2: What is the primary tool of monetary policy used by the Monetary Authority of Singapore (MAS)?
- Interest rate adjustments
- Exchange rate management through the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band (Correct answer)
- Money supply targeting
- Reserve requirement changes
Correct answer: Exchange rate management through the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band
Unlike most central banks that use interest rates, MAS manages monetary policy through the exchange rate, adjusting the S$NEER policy band. This is more effective for Singapore's small, open, trade-dependent economy.
Question 3: What type of market structure is a monopoly?
- Many sellers with identical products
- A single seller dominating the entire market with high barriers to entry (Correct answer)
- A few large sellers
- Many sellers with differentiated products
Correct answer: A single seller dominating the entire market with high barriers to entry
A monopoly is a market structure with a single seller, no close substitutes, and significant barriers to entry (legal, natural, or strategic). The monopolist is a price maker.
Question 4: What is the 'crowding out' effect in the context of Singapore's fiscal policy?
- Too many people in public spaces
- Government borrowing raises interest rates, which reduces private sector investment and consumption (Correct answer)
- Government spending creating too many jobs
- Public transport being overcrowded
Correct answer: Government borrowing raises interest rates, which reduces private sector investment and consumption
When the government borrows heavily to finance spending, it competes with the private sector for funds, potentially driving up interest rates and reducing (crowding out) private investment.
Question 5: What is a 'negative externality' and give a Singapore-relevant example?
- A benefit to third parties
- A cost imposed on third parties not involved in a transaction, e.g., air pollution from factories affecting nearby residents' health (Correct answer)
- A government tax
- A reduction in consumer surplus
Correct answer: A cost imposed on third parties not involved in a transaction, e.g., air pollution from factories affecting nearby residents' health
A negative externality is a cost borne by third parties who are not part of the economic transaction. In Singapore, examples include industrial pollution, traffic congestion, and second-hand smoke.
Question 6: How does Singapore's free trade agreement (FTA) network benefit the economy?
- It limits imports to protect local industries
- It reduces or eliminates trade barriers, giving Singapore exporters preferential access to markets and attracting foreign investment (Correct answer)
- It increases tariffs on all goods
- It only benefits agricultural exports
Correct answer: It reduces or eliminates trade barriers, giving Singapore exporters preferential access to markets and attracting foreign investment
Singapore's extensive FTA network (with the EU, US, China, ASEAN, etc.) provides preferential market access for exports, attracts MNCs that use Singapore as a hub, and reduces costs for imported inputs.
A-Level Economics 2
Why is Singapore particularly vulnerable to imported inflation?