What this lesson teaches
I can explain how monetary policy can help a government meet its macroeconomic aims.
Syllabus K343, 4.3.3. Effect of monetary policy on government macroeconomic aims: how monetary policy measures may enable a government to achieve its macroeconomic aims
Make a guess
MAS lets the Singapore dollar rise faster. Who is most likely to lose out?
- Households buying imported food, which now costs more.
- Exporters, whose goods become dearer for foreign buyers.
- No one, because a stronger currency helps the whole economy.
Show the answer
Exporters, whose goods become dearer for foreign buyers.
A stronger S$ means foreign buyers pay more in their own currency, so exporters may sell less.
Tighter monetary policy slows inflation but also growth; looser policy supports growth and jobs but risks inflation.
Low inflation. To bring inflation down, the central bank tightens policy: it raises interest rates, slows the growth of money, or lets the currency rise. Loans cost more, so households and firms spend less. A stronger currency makes imports cheaper, so imported food, fuel and parts rise in price more slowly. Firms facing weaker demand and lower import costs raise prices less.
Growth and employment. In a recession the central bank loosens policy. Lower interest rates make loans cheaper, so firms buy machines and households buy homes and cars. A weaker currency makes exports cheaper for foreign buyers, so exporters sell more. Firms need more workers to meet the extra demand, so output grows and cyclical unemployment falls.
Balance of payments. A weaker currency makes exports cheaper and imports dearer, which can shrink a current account deficit. A stronger currency does the reverse, so a country fighting inflation with a stronger currency may see its current account weaken.
Limits. One move helps one aim and can hurt another: tighter policy slows inflation but also slows growth and hiring. Effects take months to show. And if firms and households are pessimistic, they may not borrow even when loans are cheap.
- Tighter monetary policy
- Higher interest rates or a stronger currency: lower inflation, slower growth.
- Looser monetary policy
- Lower interest rates or a weaker currency: more growth and jobs, risk of inflation.
- MAS 2021-2022
- MAS tightened five times between October 2021 and October 2022 to fight imported inflation.
- MAS 2026
- MAS tightened again in April and July 2026, when imported energy prices rose sharply.
Worked example: MAS fights inflation in 2021 and 2022
In 2021 and 2022 the prices of imported food and energy rose sharply, and inflation in Singapore climbed. MAS tightened monetary policy five times between October 2021 and October 2022.
- Measure: MAS let the Singapore dollar rise faster against the currencies of Singapore's trading partners.
- Chain: imports priced in foreign currency cost fewer Singapore dollars, so the prices of imported goods in Singapore rose more slowly than they would have.
- Who gained: households and firms buying imports, which is almost everyone in Singapore.
- Who lost: exporters, whose goods became dearer for foreign buyers, so the policy risked slower growth.
- MAS used the same measure again in April and July 2026. Shipping through the Strait of Hormuz was disrupted, so imported oil, gas and fuel cost more, and MAS let the Singapore dollar rise slightly faster.
Watch out for this
A stronger Singapore dollar helps Singapore's exporters sell more.
A stronger dollar makes Singapore's exports dearer in foreign currency, so exporters find it harder to sell. It helps importers and lowers inflation.
Check your understanding
Singapore's central bank allows a quicker appreciation of the S$. Which macroeconomic aim gains most?
- Low inflation, as imports cost fewer Singapore dollars
- Lower unemployment, because exporters will hire more workers
- Faster growth, because exports become cheaper abroad
Show the answer
Low inflation, as imports cost fewer Singapore dollars
Right. Cheaper imports slow the rise in prices in a country that imports most of what it uses.
Check your understanding
A central bank raises interest rates. Which outcome is most likely in the following months?
- Inflation rises because spending grows
- Spending on homes and cars falls
- Households save less of their income
- Firms borrow more to buy machines
Show the answer
Spending on homes and cars falls
Right. Loans cost more, so households delay big purchases they would borrow for.