Fiscal Policy

Contents

Question No 1:        1

Question No 2:        2

Question No 3:        2

Question No 4:        4

Question No 5:        6

Question No 1:

Fiscal policy includes the use of the government spending and imposed tax to affect the country economy. The country faces budget deficit when the current expenditure exceed the income. To avoid this situation country need to reduce its expenses and increase the activities that generates revenue or income. When oil prices decrease in the international market the GCC will face budget deficit because the income from oil decrease. Government of UAE should introduce the Value added tax on their good and service to avoid the budget deficit. Value added tax is simple and increases the revenue of the government without affecting the wealth of the economy.

Question No 2:

The Value added tax is the tax imposed on the good and service.  It is applied on all the product use to produce any good and service. It helps the government of the UAE to increase its tax revenue without effecting the demographic. It encourages the production of goods and services domestically because tax revenue will be raise in value added tax system. It generates lot of money for the government. Value added tax increase the inflation in the economy and decrease in GDP of the company. It might also cause job loss. At every single point of the product the value added tax impose which increase the prices of the products and services. It discourages the domestic production. Less resources are available to the more efficient private sectors hence this lower the efficiency of the economy.

Question No 3:

Part A:

Contractionary policy is use to reduce the inflation rate by increasing the interest rate so that people keep their money in bank to get advantage of high interest rate and have less money in hand to use this result in reduction in inflation while the expansionary policy is when the country is facing recession the interest rate decreases so that people keep their money in hands and spend more. Increasing the interest rate refer to the contractionary monetary policy

Part B:

Increase in interest rate decreases the consumer spending and investment. The aggregate demand will decrease.

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Figure 1

The increase in the interest rate make it expensive of the people to borrow the money, saving the money is more beneficial.  People are more likely to keep their money in bank rather than taking the loans. People will have less money in their hands to spend so the consumption will reduce. Companies will not invest in new capital. The decrease in the consumption and investment will cause fall in the aggregate demand.

PART C:

Tools for implementation of the Expansionary Policy:

1. Open Market Operation:

Central bank buys the securities when wants to implement the expansionary policy, bank has large cash reserve and more money to lend. Money supply increases and interest rate decreases.

1. Reserve Requirement:

Central bank can impose the requirement of reserve on bank. When the reserve requirement is low the bank can lend its deposits. It cause increase in money supply and decrease interest rate.  Cause expansionary policy.

Tools for implementation of the Contractionary Policy:

1. Open Market Operation:

Central bank sells the securities when wants to implement the contractionary policy, bank has less cash reserve and less money to lend. Money supply decrease and interest rate increase.