macroeconomics - frameworks

Question 1

what are a few possible causes of increase in cost of production?

Answer 1

1. supply shocks
2. increase in wages
3. increase in input prices

supply shocks (shock in supply chain getting imports into sg –> pandemic) , increase in wages, changes in input prices (e.g. raw materials –> oil, water, electricity)

Question 2

explain what happens when imported FOPs / wages increase in cost. (impact on GPL and RNY)

Answer 2

when imported FOPs/wages increase in cost, firms become less w&a to produce g&s, thus leading to a decrease in SRAS. as such, there will be a shortage of g&s at the existing AD level, exerting upwards pressure on GPL resulting in prices increasing from P0 to P1. Consequently, due to the fall in SRAS, RNY also falls from Y0 to Y1

Question 3

explain how extensive increase in AD results in demand-pull inflation.

Answer 3

when there is an extensive increase in AD, the economy runs into full employment level and faces a shortage of scarce factors of production. as such, firms undergo a bidding process as they bid up the prices of scarce FOPs, resulting in factor input prices increasing and translating to higher general price levels (GPLs), as seen from P0 to P1. the economy hence suffers from demand-pull inflation.

Question 4

inventory process

Answer 4

when there is an increase in ad, firms experience an unplanned depletion of inventory, necessitating them to step up production and hire more FOPs such as labour, since labour is a derived demand of production. this leads to a fall in demand-deficient unemployment. besides, due to the total output of the economy increasing, there will be an increase in RNY. and the economy hence experiences actual EG.

Question 5

multiplier process

Answer 5

this is enhanced by the multiplier process, where the initial increase in AD leads to subsequent increases in AD as one’s man’s spending is another man’s earning. this process continues indefinitely until withdrawals = total injections. hence, there will be a multiplied increase in RNY as seen from Y0 to Y1.

Question 6

explain the benefits of long-run supply-side policies

Answer 6

• when there is an improvement to factor q&q through LR-SS policies, this results in an increase in productive capacity in the economy (hence LRAS & full employment levels will increase)
• this also helps to increase productivity (output per unit input) and hence lowers COP in light of larger factor q&q. (producers are hence more w&a to increase the production of g&s, leading to an increase in SRAS)
• as such, there would be an outward shift of the AS curve.
• max output that can be produced in the economy increases (yf0–>yf1)
• RNY increases due to the fall in COP and increase in SRAS where output of firms will rise
• this relieves cost-push inflation in the economy as there will be a surplus of g&s, hence exerting a downward pressure on GPL, as seen from P0 –> P1.
• likewise, demand-pull inflationary pressures will be relieved as there will be an increase in spare capacity in the economy, helping to reduce supply bottlenecks and the need to bid for FOP.

INVESTOR CONFIDENCE
- improvement of factor q&q –> boosts investor confidence in the economy –> inflow of FDI –> further boosts AD + increases capital deepening

• as such, lras & prod cap will increase again
• results in sustained EG