Assume that the Malaysian Prime Minister proposes to implement an economic recovery plan valued at RM300 million comprising of tax cuts and government transfer payments to households. If taxes fall by RM150 million and the spending on government transfer payments increases by RM150 million, which component ( transfer payments to households or tax cuts) of the recovery plan would have the larger effect on the equilibrium of aggregate expenditure, assuming other things are unchanged? a) Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy i. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates ii. In view of your answers, explain the following statement: “Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely.” iii. “When the Federal Government of Malaysia is concerned about an economic downturn, it sells government securities. Is this statement correct or incorrect? Explain your answer.
Assume that the Malaysian Prime Minister proposes to implement an economic recovery plan valued at RM300 million comprising of tax cuts and government transfer payments to households. If taxes fall by RM150 million and the spending on government transfer payments increases by RM150 million, which component ( transfer payments to households or tax cuts) of the recovery plan would have the larger effect on the equilibrium of aggregate expenditure, assuming other things are unchanged?
a) Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy
i. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates
ii. In view of your answers, explain the following statement: “Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real
iii. “When the Federal Government of Malaysia is concerned about an economic downturn, it sells government securities. Is this statement correct or incorrect? Explain your answer.
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