Challenge

All students taking A-Level Economics in Singapore (either in 2014 or 2015) can participate.

The Challenge

Using H2 Economics knowledge, draw, write and submit via email (econoception@gmail.com) to me diagrams/pictures with explanation (250 words limit) to capture the story borne out by the six quotes in an article from this week’s The Economist:

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Formulating Economic Policies

How is monetary policy determined?

To understand how a policy is formulated, you have to first understand the motivation of the Central Bank. Depending on the country we are referring to, the central bank either is independent of or controlled by the government. Regardless, in general it is safe to assume that the Central Bank wants to achieve its mandate. For the Federal Reserve in the US, it is maximum employment (5.2% to 5.5%), stable prices (2% inflation), and moderate long-term interest rates; for the Bank of England, it is similar, it has the dual mandate of maintaining financial stability and meeting the government’s inflation target, which is at 2%; for the Monetary Authority of Singapore, it aims to promote sustained non-inflationary economic growth, a sound and progressive financial centre using the exchange rate as a main policy instrument. The key economic principle here is that agents respond to incentives, and agents are rational. The Central Bank’s staff is incentivised to achieve the bank’s objectives and will find ways to do so actively.

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Allocative Efficiency

Allocative efficiency is defined as a situation where a combination of goods and services that maximises society’s welfare is produced and consumed, for a particular distribution of wealth.

In H2 economics, you learn that the free market achieves allocative efficiency in the absence of market failure. This is easily seen from diagrams where you show how the consumer and producer surplus are maximised.

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