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CH9: Workings of Fiscal Policy, AD increases due to increase in injections…
CH9: Workings of Fiscal Policy
Expansionary fiscal Policy
Increase in Govt. Spending
Increase in transfer payment (Increase C)
Increase spending on goods and services (Increase G)
Increase in public works projects (Increase G)
Reducing Taxes
Reduce or eliminate certain taxes. Leads to increase in disposable income and thus increase in C. AD increases
Contractionary fiscal policy
Reduce Govt. spending
(Opposite of Expansionary Fiscal Policy)
Increasing Taxes
(Opposite of Expansionary Fiscal Policy)
Limitations
Problems of Magnitude
Crowding out effect
Size of multiplier, k
Forecast error
Trade-offs with other macro goals
Problems of implementation
Political Pressure
Debt sustainability
Problems of Timing
Time lags
Recognition lag
Administrative lag
Operational lag
Inflexibility
FP in SG context
High import leakage and high saving leads to a very low multiplier, k.
Lack of rss and dependance on FDI and foreign manpower to support economic growth leads to a need to maintain a competitive tax regime to attract FDI and talents overseas. This limits the govt's ability to raise tax rates to finance its expenditure.
SG adopts a prudent FP (maintain budget surplus) to build up govt. reserves to ensure that there are enough rss to ride out any economic crisis (recession)
AD increases due to increase in injections
Stimulate AD increase and increase RNY by multiplier effect. Results in budget deficit
Lower AD in times of inflation via reverse multiplier effect. Results in budget surplus