Question

Which of the above mentioned two recessions scenarios (the contraction in the Singaporean economy is mainly driven by supply side factors or demand side factors), is more challenging for the policy makers to deal with (the government and the central bank)? and why?

Answer 1

Ans.

From the above mentioned two recessions scenarios namely the contraction in the Singaporean economy is mainly driven by supply side factors or demand side factors, the more challenging for the policy makers to deal with will be supply side , supply side causes higher inflation and lower output .

High inflation rates persisted in the 1970s and early 1980s in Europe and the United States on the basis of expectations even after these economies had sunk into recession. The resulting slow or negative economic growth combined with high unemployment and rising inflation was termed stagflation.

Central banks, the monetary authority in most economies, monitor the domestic inflation rates closely when conducting monetary policy. Monetary policy determines interest rates and the available quantities of money and loans in an economy. A high inflation rate combined with fast economic growth and low unemployment usually indicates the economy is overheating, which may trigger some policy movements to cool it down. However, if a high inflation rate is combined with a high level of unemployment and a slowdown of the economy—an economic state known as stagflation (for stagnation plus inflation)—the economy will typically be left to correct itself because no short- term economic policy is thought to be effective.