Economic Crisis and Economic Recession

Question: Discuss about the Economic Crisis and Economic Recession. Answer: The article highlights the inception of a potential economic crisis which presents a possibility of worsening into an economic recession; something that the Monetary Authority of Singapore indicated too. It further illustrates how a drop in the quantity produced in an industry and the consequential reduction of business confidence is deeply confirmed by a drop in both labor demands and growth rate of the economy. As explained in the article, there are two main markets in question; Electronics and Precision Engineering. Singapore is undergoing an economic slump because its buyers who are mainly United States of America (USA) and Japan have cut down the quantity of goods they used to import from Singapore. A recession is an economic transaction, where there is falling real GDP (negative growth) and increasing unemployment of resources which lasts six months or more. As signs of weakening business activity remain confined to certain industries, the Government of Singapore can use two policies to combat this crisis: an expansionary fiscal policy or an expansionary monetary policy. Both policies will help in getting the economy out of a depression phase. An expansionary fiscal policy is a Fiscal policy undertaken to eliminate a recessionary gap whereas the expansionary monetary policy has an objective of expanding the aggregate demand and the level of economic activity. America and Japan, leading to a fall in the Gross Domestic Product (GDP) and hence an overall decrease in the AD. A leftward movement in the AD from AD1 to AD2 would occur due to a decrease in the net exports in the economy, leading to a fall in both the overall price level as well as the real GDP, making a new equilibrium at Y REC and hence leading to cyclical unemployment as cyclical unemployment occurs during the downturns of the business cycle, when the economy is in a recessionary As an expansionary fiscal policy is a policy assumed to eradicate an economic depression gap, a rightward shift in AD will occur due to an increase in the government expenditure and a reduction in taxation, rising the consumption as well as the investment spending. As the overall and resident unemployment rates are likely to rise slightly, The economy of Singapore is in a state of slump due to their dropping amount of exports, the undergoing economic reconstruction coupled with the fact that most Singaporeans lost business confidence. This implies that they save more while spending less. Furthermore, the implementation of this policy will help the market return back to its original equilibrium (YP) and therefore overcome the recessionary phase. The expansionary fiscal policy would help eliminate the recessionary gap by either reducing the tax rates (business taxes for the electronics and precision engineering industries), increasing the government spending or by decreasing the tax rates and increasing the government spending at the same time. This would therefore increase the AD, improving the economic growth in Singapore and help recover from the recessionary gap A monetary policy on the other hand impacts indirectly on aggregate demand through the rate of interest. In this graph (Fig.3), a decrease in the interest rates from i 1 to i 2 would increase the demand for money from Q1 to Q 2. This implies that the Expansionary Monetary Policy will lead to more consumption, business borrowing and hence spending (higher Consumption and Investment), and therefore shift AD to the right, as shown in Fig.3. This is due to a fall in the interest rates, making the borrowing cheaper and increasing the consumption and spending. One major drawback of using these policies is the negative growth in the economy due to a high inflation rate as a rise in the AD of goods and services would lead to an increase in the price levels, leading to inflation. Inflation is defined as a sustained increase in the general price level hence a mild rate of inflation would encourage greater stability, encouraging firms to assume risks and invest even more. Generally, expansionary fiscal policy would be a better option for people living in Singapore as they have a relatively lower business confidence. An expansionary monetary policy can lead to numerous problems such as time lags, ineffectiveness in recession and inability to deal with stagflation. Whereas, an expansionary fiscal policy would help increase the amount of disposable income both firms and consumers would have, increasing the amount of consumption and investment and therefore leading to an increase in the GDP. Bibliography: Tragakes, Ellie. Economics for the IB Diploma- Second Edition (Cambridge: Cambridge University Press, 2012)