The United States has proposed a Trans-Pacific Partnership (TPP),

| November 24, 2016

Question 1

The United States has proposed a Trans-Pacific Partnership (TPP), which is a regional free trade area

intended to enhance trade and investment among the partner countries. As at 2014, there are 12

members participating in the TPP, including USA, Australia, Brunei, Canada,Chile, Japan, Malaysia,

Mexico, New Zealand, Peru, Singapore and Vietnam.

(a) Discuss and explain the possible benefits and costs of members joining the TPP?

(10 marks)

(b) A major obstacle in the TPP is the rigourous objection by the Japanese farmers on the import of

farming product into Japan without tariff. With a suitable diagram, analyse why the Japanese

farmers are strongly opposing the removal of tariffs on farming product into Japan.

(10 marks)

Question 2

(a) Refer to the website of Singapore Department of Statistics, balance of payments at

http://www.singstat.gov.sg/statistics/browse-by-theme/international-accounts.

Search for the reports on the balance of payments of Singapore from 2010 to 2013. Go through

the reports and discuss the current account balance and the capital account balance. Explain the

balance of payment position of Singapore over time. What can you say about the investor’s

confidence about investing in Singapore?

(10 marks)

(b) Singapore has been able to control inflation well in spite of the lack of natural resources which

requires importing many products from other countries and hence subject to import inflation. The

inflation rate is hovering around 3% over a long period of time. Based on the purchasing power

parity theory, what can you predict about the strength of Singapore dollar against the major

trading partners’ currencies? Explain.

(5 marks)

Question 3

(a) Consider an open economy without a government sector. It has the components of aggregate

spending as follows:

C = 120 + 0.8Y

M = 60

I = 500

X = 200

C is consumption, Y is income, M is import, I is investment and X is export.

(i) Discuss and determine the saving function, the multiplier, the equilibrium level of income and

the trade balance at the equilibrium level of income.

(5 marks)

(ii) Suppose import now becomes positively related to output as M = 60 + 0.05Y. What is the new

multiplier, the new equilibrium level of income and the new trade balance at this equilibrium level

of income? Discuss.

(5 marks)

(b) Analyse why monetary policy is ineffective under a fixed exchange rate system.

(5 marks)

Question 4

(a) An economy on a fixed exchange rate system has been running a trade surplus for many years.

This has led to accusations by its trading partners that the economy has deliberately undervalued

its currency to boost its export. Analyse the effect on the economy’s trade balance and balance of

payment when its currency is under-valued. What can you comment on the output and

employment of the economy? Discuss with the help of a suitable foreign exchange market

diagram.

(8 marks)

(b) Analyse the effect on the trade balance, balance of payments, output and employment of an

economy when the economy that implements a fixed exchange rate system overvalues its

currency. Discuss with the aid of a suitable foreign exchange market diagram.

(7 marks)

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