Monetary and Fiscal Policy
Inflation
Policies to manage inflation
Introduction: Inflation is the sustained and continuous hike in the general price level of goods and services in the economy. Inflation affects the real value of money which in turn affects the purchasing power of consumers. In short, a dollar today can buy less than a dollar could in the past due to inflation. Economies aim to achieve a healthy rate of 2-3% inflation rate every year. As inflation always fluctuates, it causes policies which have been implemented to worsen when inflation does not fall within the healthy range. There are 2 policies to manage inflation rate which is the monetary and the fiscal policy. These 2 policies are good complements and are able to effectively have direct control of the economy as the monetary policy controls the supply of money and fiscal policy controls and affects the demand placed on the goods and services.
1. Monetary Policy
Singapore’s central bank which is the Monetary Authority of Singapore (MAS) take a different approach to target domestic interest rates unlike other central banks which implement and follow policies which would tackle domestic interest rates directly as they believe in the theorem of “The Theorem of Impossible Trinity” of which Singapore has an open economy and an open capital account which would be difficult to manage between money supply and the domestic interest rates.
Demand for funds
All banks in Singapore would have a certain amount of cash in their current account placed with MAS. According to the policy, they are required to have a minimum cash balance (MCB) in the account whereby 3% is taken of their qualifying liabilities for every 2 weeks. On a day to day basis, (MCB) are allowed to fluctuate within the range of 2%-4%. By doing this it helps to reduce huge daily interest rate fluctuations. This is because the banks are allowed to fluctuate their (MCB) within the range of 2%-4%. This makes the demand for cash balances to be more
Policies to manage inflation
Introduction: Inflation is the sustained and continuous hike in the general price level of goods and services in the economy. Inflation affects the real value of money which in turn affects the purchasing power of consumers. In short, a dollar today can buy less than a dollar could in the past due to inflation. Economies aim to achieve a healthy rate of 2-3% inflation rate every year. As inflation always fluctuates, it causes policies which have been implemented to worsen when inflation does not fall within the healthy range. There are 2 policies to manage inflation rate which is the monetary and the fiscal policy. These 2 policies are good complements and are able to effectively have direct control of the economy as the monetary policy controls the supply of money and fiscal policy controls and affects the demand placed on the goods and services.
1. Monetary Policy
Singapore’s central bank which is the Monetary Authority of Singapore (MAS) take a different approach to target domestic interest rates unlike other central banks which implement and follow policies which would tackle domestic interest rates directly as they believe in the theorem of “The Theorem of Impossible Trinity” of which Singapore has an open economy and an open capital account which would be difficult to manage between money supply and the domestic interest rates.
Demand for funds
All banks in Singapore would have a certain amount of cash in their current account placed with MAS. According to the policy, they are required to have a minimum cash balance (MCB) in the account whereby 3% is taken of their qualifying liabilities for every 2 weeks. On a day to day basis, (MCB) are allowed to fluctuate within the range of 2%-4%. By doing this it helps to reduce huge daily interest rate fluctuations. This is because the banks are allowed to fluctuate their (MCB) within the range of 2%-4%. This makes the demand for cash balances to be more
Bibliography: By Monetary Authority Of Singapore, Taken on 09/07/2013. www.mas.gov.sg http://www.mas.gov.sg/Monetary-Policy-and-Economics/Monetary-Policy/~/media/MAS/About%20MAS/Monographs%20and%20information%20papers/20130313%20Monetary%20Policy%20Operations%20Monograph.pdf Pictures: By Tim Kelly, Taken on 22/07/2013 www.themoralliberal.com http://www.themoralliberal.com/wp-content/uploads/2011/05/Warning-hyper-inflation.jpg By Straits Time, Taken on 22/07/2013 www.stasiareport.com http://www.stasiareport.com/sites/straitstimes.com/files/27092464e.jpg By Greenberg, Taken on 22/07/2013 www.welkerswikinomics.com http://welkerswikinomics.com/blog/wp-content/uploads/2008/09/fiscal-conservative.jpg