Answered: QUESTION 1 : The revised Budget is…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 12CQ

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QUESTION 1 : The revised Budget is expected to focus on two thrusts, which are optimising government spending, as well as addressing 'bread and butter' issues to help Malaysians, especially the low and middle income earners, tackle concerns over cost of living. Employees EPF contribution reduced by 3pct from Mar 2016 to Dec 2017.

(Hint: EPF as an automatic stabilizer and how it affects disposable income & GDP).

QUESTION 2 : PM Najib tabled Budget 2016 in the Dewan Rakyat on Friday. Najib, who is a Finance Minister, said the theme of the 2016 Budget is "Prospering the Rakyat". The following are the highlights of his speech: RM267.2 bil has been allocated under Budget 2016, compared with the revised RM260.7bil in 2015. A payment of RM500 for all civil servants to help with cost of living.

(Hint: Payment to civil servants as government spending and how it affects disposable income & GDP).

Based on the above 2 questions, indicate whether the below budget will influence Consumption, Investment, Government or Net Export. Structure the flow of both of your answers based on the image attached below.

How does an automatic stabiliser work?
o Components of FP (TA, G and TR) will automatically lower any shock (unexpected
change) in an economy
o
Stabilize business cycle fluctuations automatically
o Eg: Recession → Unemployment rises, Income falls → taxable income falls →
The unemploved will have access to TR→ Yd rises → C rises →AD ↑ →Y ↑
→ less recession

or both
Expansionary fiscal policy transmission mechanism: (only focus on SR)
Tax (TA) reduces → disposable income (Yd) of consumers
increases → consumption (C) increases → aggregate demand
(AD) increases → GDP increases, unemployment rate reduces
and inflation rate increases.
Government spending (G) increases → aggregate demand
(AD) increases →→ GDP increases, unemployment rate reduces
and inflation rate increases.

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