Measures to reduce cyclical unNt: EFP

Question 1

Define expansionary fiscal policy

Answer 1

• gov increase spending and/or decrease taxes
• increase AD
• only suitable if cause of unNt is fall in I and C which causes a fall in AD

Question 2

Increase G

Answer 2

• increase G expenditure on final goods and services e.g building infrastructure, education, healthcare
• rises AD
• e.g. “Build, build, build” project aims to reduce poverty, increase economic growth and reduce congestion in Metro Manila
• consists of infrastructural projects (open more job opportunities)

Question 3

Lower Taxes (T)

Answer 3

• lower taxes to rise AD
• personal income tax, disposable income, C
• e.g. from 2012, Sgporeans pay less tax (personal income tax reduced for first $120,000 of chargeable income)
• corporate income tax, post-tax profits, I
• e.g US corporate income tax rate cut down to 21% from 35% (I) - more funds for I

Question 4

Strength of fiscal policy

Answer 4

1. G effective in deep recession

2. Targeting of specific economic sectors

Question 5

G effective in deep recession (+)

Answer 5

• pulls economy out of deep recession, reduces cyclical unNt
• e.g. 2008, fear of a major global recession made gov arnd the world use EFP by increasing G and lowering T to increase AD
• G is a component on AD and has a direct effect on it
• helpful to policy makers who want to be certain that changes in spending are likely to increase AD

Question 6

Targeting of specific economic sectors (+)

Answer 6

• composition of spending can vary depending on gov priorities
• EFP can target specific sector by making changes to the composition
• e.g. focus on education (or particular levels in education); healthcare
• e.g. in 2020, gov spent more on affected sectors ie. aviation, tourism industry due to COVID-19

Question 7

Crowding out effect (-)

Answer 7

• can affect effectiveness of the EFP
• if rise in gov expenditure is financed by borrowing from private capital markets
• increase in demand for funds will cause i/r to rise
• lowers lvl of private investment due to higher cost of borrowing
• crowding out of private investment dampens expansionary effect on initial rise in G

Question 8

Gov expenditure as a ratio of GDP (-)

Answer 8

• affects effectiveness of EFP
• Sg gov averaged 16% of GDP from 2000 to 2009
• considered low in comparison to other economies (Asia) which range from 15 to 30% of GDP
• OECD countries range frm 30%to 50% (Organisation for Economic Co-operation and Development)
• rise is G has small expansionary effect on national output and unNt

Question 9

Conflict with other macroeconomic goals (-)

Answer 9

• using EFP to reduce unNt may lead to conflict with the macroeconomic goal of low inflation
• when AD increases, unNt falls as firms expand production, hire more workers
• as expansion continues, less unemployed workers available, drive up wages as firms compete for workers
• higher cop, increase GPL when economy is near full unNt (keynesian)

Question 10

Time lag (-)

Answer 10

1. recognition lag - gov recognise problem (economy facing falling AD)
2. decision-making lag - make decision, determine what policies to implement
3. implementation lag - implement policies (once decided, only implemented some time in the future
4. response lag - effects of policies on economy is not felt immediately
   - time-lag dependent of gov efficiency
   - if too long, overall expansionary effect of increase G not effective
   - becos economy might have worsened, stronger dose of intervention needed

Question 11

Political pressure (-)

Answer 11

• gov face pressure to make changes to G and T that arent linked to EFP
• e.g pressured to decrease tax as it is political popular