Cyclical unNt - Expansionary Fiscal Policy

Question 1

Define expansionary fiscal policy (EFP)

Answer 1

• increase G
• and/or decrease T
• raise AD

Question 2

Increase G (Sg)

Answer 2

• Sg badly hit by COVID-19 pandemic in 2020
• G committed to spending of S$90 bil
• rise in G, rise in AD, increase pdtn of gds and svcs
• rise in derived dd for labour
• fall in unNt

Question 3

Decrease T (Sg)

Answer 3

• Cut in corporate income tax (2009) from 18% to 17%
• battle impact of US subprime crisis on SG
• rise in post-tax profits
• rise in I and AD
• draw AD/AS diagram

Question 4

Evaluation (+ve)

Answer 4

• effective in deep recession
• SG worst recession in 2020 since independence
• low household and business confidence
• fall in C and I
• many trading partners ie. US and China – varying ver of economic lockdown, recession
  -fall in in export revenue and AD due to fall in incomes of major trading partners (X-M)
• only way to boost economy was thru increasing G

Question 5

Evaluation (-ve)

Answer 5

• G as a ratio of Sg’s GDP relatively small (16-19%)
• even rise in G in 2020 – only 20%
• rise in AD may not be significant
• effectiveness – questionable

Question 6

Other +ve

Answer 6

• targeting of specific economic sectors

Question 7

Other -ve

Answer 7

• Crowding out effect
• Time lag
• Conflict w other macroeconomic goals
• Sustainable debt

Question 8

Crowding out effect

Answer 8

• when G financed by borrowing frm private capital mkts
• drive up IR
• higher COB, fall in I
• dampens initial rise in AD frm G
• draw diagram + illustrate partial crowding out effect

Question 9

Time lag

Answer 9

• recognition, decision-making, implementation, response lag
• efficiency of gov
• bureaucracy and red tape

Question 10

Conflict w other macroeconomic goals

Answer 10

• low inflation
• healthy balance of payments
• explain:
  1. how wages are driven up when reaching Yf
  2. net exports fall due to rise in gpl (bop worsen, assuming no change in financial acct)

Question 11

Gov debt

Answer 11

• amt of money gov owes to lenders outside of gov itself
• G > tax revenue –> deficit
• vice versa –> surplus
• over time, debt = deficit - surplus
  -measure using debt as a ratio of GDP of borrowing cty

Question 12

sustainable debt

Answer 12

• borrowing gov
• can meet present and future debt obligations
• w/o accumulating overdue debt payments

Question 13

costs of high gov debts

Answer 13

• debt servicing
• possible recession

Question 14

Debt servicing

Answer 14

• payments that must be made in order to repay principal + interest payments
• major opp costs
• debt borrowed frm foreign leaders – foreign currency
• need to use X earnings
• less foreign exchange to pay for pdtn gds and inputs
• fall in pdtive capacity
• inward shift of ppc
• -ve impact on econ growth

Question 15

Possible recession

Answer 15

• lower G or raise T to achieve budget surplus
• recession –> cyclical unNt, incomes fall
• gov have to spend on unNt benefits
  -vicious cycle of falling AD and real GDP
• e.g. Greece (2010-2014) - combat 2008 global recession -ve effects
• gdp fell so much that ratio of debt to GDP increased

Question 16

What gov can do to address possible conflict of macroeconomic goals

Answer 16

• ss side effects
• rise in G on education; training – increase labour productivity, increase LRAS
• fall in personal Y tax – more incentive to work as can keep larger proportion of income, encourage voluntarily unemployed to work agn
• rise in labour ss – increase LRAS
• • rise in LRAS allows economy to have sustained econ growth w low inflation and Yf