MAS Monetary Policy during COVID-19 — Exchange Rate and National Output

Answers

(i) How monetary policy raises national output [4] — explain

In Singapore, monetary policy is conducted through the exchange rate, so easing means allowing the Singapore dollar to depreciate (Extract 4: “depreciated to a level slightly below the mid-point of the policy band”).

A weaker Singapore dollar makes Singapore’s exports cheaper relative to foreign currency, raising export competitiveness and the quantity of exports demanded. Export revenue (X) rises, so net exports and hence aggregate demand increase. On the AD/AS diagram, AD shifts right from AD₀ to AD₁, raising real national output from Y₀ to Y₁.

(ii) One unintended consequence of further monetary easing [2] — explain

“Further monetary easing” means a continued depreciation of the Singapore dollar. Because Singapore is heavily import-dependent for raw materials and essentials, depreciation raises import prices in domestic-currency terms, driving up firms’ unit costs and generating imported cost-push inflation — exactly the “spikes in import prices of essentials including food and medical supplies” Fitch Solutions warns of. This undermines the macroeconomic goal of price stability.