Explain how the global economic rebound and global supply chain disruptions might have consequences on Singapore's aggregate demand and aggregate supply.

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Consumer prices in Singapore rose by 6.1 percent in 2022, the fastest rate of increase since 2008. This dramatic rise in inflation was driven by a range of factors — the global economic rebound and global supply chain disruptions.

(a) Explain how the global economic rebound and global supply chain disruptions might have consequences on Singapore's aggregate demand and aggregate supply. [10]

Aggregate demand

The global economic rebound, following the severe downturn caused by the COVID-19 pandemic, led to a rise in global incomes. As incomes in major economies such as the U.S., China, and the Eurozone increased, the demand for goods and services — particularly exports from small, open economies like Singapore — also grew. This rise in export demand would lead to an increase in Singapore's export revenue, directly affecting the net export component of AD, denoted as (X - M). A higher (X - M) increases AD, contributing to an outward shift from AD0 to AD1 on the AD-AS diagram.

Additionally, as consumer and business confidence improved due to the global economic recovery, domestic consumption (C) and investment (I) would likely increase. Singapore, being a trade-dependent economy, is sensitive to shifts in global sentiment. The positive economic outlook would encourage firms to invest more in capital goods, while households may feel more secure in their employment prospects, leading to higher consumption levels. Both C and I are significant components of AD, and their rise would contribute to the increase in AD. This higher demand for goods and services pushes the economy to a higher level of output (Y1), along with an increase in the price level from P0 to P1 as excess demand pressures prices upwards.

In sum, the global economic rebound drives multiple components of AD, leading to higher real national income (Y) and a higher general price level (P). However, this increase in AD may not be fully beneficial if it is accompanied by inflationary pressures, as was the case in Singapore in 2022, where inflation hit 6.1%.

Aggregate supply

On the supply side, global supply chain disruptions have played a key role in increasing production costs. During the pandemic, many key global supply routes faced severe delays due to lockdowns, labour shortages, and port congestion. The cost of shipping goods skyrocketed, and the availability of essential parts and raw materials became more limited. Singapore, which relies heavily on imports for its manufacturing and export-oriented industries, was significantly affected by these disruptions.

The increased cost of imported inputs raised the overall cost of production for firms. As a result, the short-run aggregate supply (SRAS) curve shifted to the left, from AS0 to AS1. This reduction in SRAS implies that firms were less able or willing to produce at previous output levels due to higher costs. The leftward shift in SRAS would result in higher general price levels (from P0 to P1), but with a fall in real national income (from Y0 to Y1). This contraction in supply capacity exacerbates inflationary pressures, leading to a situation of "cost-push" inflation, where rising production costs drive up prices.

Conclusion

On the one hand, the economic rebound increased aggregate demand through higher export revenues, consumption, and investment. On the other hand, supply chain disruptions constrained aggregate supply by raising production costs, leading to a leftward shift in SRAS. The combination of rising AD and falling AS caused inflationary pressures, explaining why Singapore experienced its fastest price increase since 2008.