NJC PRELIMS 06/3/3 In times of recession, a decrease in tax will ind ce s!endin" and t#ro "# t#e m lti!

lier !rocess add to income and create more $o%s& 'isc ss t#is ar" ment and consider w#et#er it necessaril( im!lies t#at it wo ld %e %etter to red ce tax& )*+, Intro/Thesis: Explain the argument Recession- t#ree consec ti.e / arters of real 0'P decrease 1' is low N2 is low #i"# nN Cons mer/% siness confidence is low 'ecreasin" taxes- ex!ansionar( fiscal !olic( Stim late le.el of economic acti.it( Note- indirect 30S45 and direct 3income tax, cor!orate tax5 taxes 6ow it ind ces s!endin" 3i&e&, 1'5 income tax 2' #o se#old C 1' cor!orate tax o domestic in.estment and 7'I 1' o !ost tax !rofits f rt#er Im indirect taxes !rices C 1' 6ow t#e m lti!lier !rocess wor8s to 1E/1' 'escri%e t#e m lti!lier !rocess Since t#e / estion s!ecificall( states t#e !rocess, draw t#e dia"ram 6ow N2 and N increase occ rs Since t#e econom( is not at 2f 3as s#own in t#e first !oint5, m lti!lier effect N2 real o t! t firms em!lo( more reso rces to !rod ce more "oods and ser.ices nN 2 Antithesis: Limitations in reducing tax 6ow some co ntries wit# #i"# MP9 t#at limit t#e effect of t#e m lti!lier Sin"a!ore as an exam!le 3#i"# MPM, MPS and low MP45 4 wit#o t 0 wo ld lead to a % d"et deficit Pro%lems w#en t#e co ntr( #as to %orrow to finance t#e deficit Not eas( to $ st 0 : !ro%lem of w#at !art of 0 to c t- socio!olitical factors Paradox of t#rift- 6ow cons mers/firms ma( not ex!ect t#e co ntr( to reco.er from recession E.en wit# 2', and !rofits, m c# of t#is will %e sa.ed Limited increase in 1' ;nfeasi%ilit( of red cin" taxes in some co ntries wit# alread( low tax rates 3li8e Sin"a!ore5 Antithesis: Other policies <efore (o start, ex!lore t#e ca ses of low 1' 3decrease in CI03=>M55& Remem%er to note #ow t#e( increase N2 and N for an econom( in recession Ex!ansionar( fiscal !olic( 0 3s!endin" on infrastr ct re, s !!l( side !olicies etc&5 o 1' 3direct in$ection into t#e econom(5 o 1S in t#e LR o Increased confidence in t#e econom( Ex!ansionar( monetar( !olic( i/r Im 1' xcr! 3if low 1' d e to low =5 de!reciatin" t#e c rrenc( = com!etiti.eness 'd= 1' o Mars#all>Lerner condition- 'e!reciation of t#e c rrenc( effecti.e onl( if 3PE')M, ? PE')=,5 @ A 4#eor( of t#e t#e im!ossi%le trinit(- ac8nowled"e #ow t#ese two !olicies cannot %e im!lemented at t#e same time 3ass min" free B flows5 S !!l( side !olicies Man!ower !olicies increase la%o r !rod cti.it( = com!etiti.eness 'd= 1', 1S o 7 nded %( 0 : do %le effect of 7P as well as s !!l(>side !olic( Evaluative comment(s) : J st mention ma(%e one or two of t#ese !oints <riefl( assess t#e effecti.eness of !olicies : es!eciall( in com!arin" 4 wit# t#e ot#er !olicies& Reco"niCe t#e need for trade offs and t#e !ossi%ilit( of !olic( conflicts& Reco"niCe t#at reco.er( from recession is not a one>off !rocess : #ow more t#an one mana"ement !olic( wo ld !ro%a%l( need to %e im!lemented, and #ow t#e reco.er( !rocess wo ld !ro%a%l( ta8e some time& 1c8nowled"e t#at some sort of "o.ernment inter.ention is re/ ired&

NJC PRELIMS 06/3/+ DC#inaEs econom( last (ear ac#ie.ed a #i"#l( im!ressi.e "rowt# rate of aro nd FG& 'omestic cons m!tion and domestic in.estment contin ed to form t#e dominant so rce of "rowt#& 4#e tr e inflation rate is !ro%a%l( a%o.e +G& 4#e econom( is o.er#eatedH The Straits Times, January 26, 2004 'isc ss t#e effecti.eness of .ario s "o.ernment !olicies t#at co ld %e sed to deal wit# t#e Io.er#eated econom(E )*+, Intro Ex!lain w#at is meant %( an o.er#eated econom( 7acin" excess demand demand>! ll inflation o 1' ra!idl( increasin" alon" t#e intermediate ran"e <rin" in t#e !ream%le- ca ses of t#e inflation 'omestic cons m!tion- < r"eonin" middle>class, increased s!endin" 3C5 'omestic in.estment- 'omestic and forei"n firms wantin" to ca!italiCe on t#e increased s!endin" wo ld in.est more in t#e C#inese mar8et 3Im5 4#ere is a # "e increase in 1' 'emand ! ll inflation o Ill strate wit# a dia"ram 6i"#li"#t !ossi%le "o.ernment !olicies to %e ado!ted SR- Contractionar( demand mana"ement !olicies LR- S !!l(>side !olicies Thesis- Effecti.eness of s c# !olicies Contractionary FP 'ecreasin" "o.ernment s!endin" 'irectl( 1' Antithesis- Limitations of s c# !olicies Increasin" taxes income tax 2' #o se#old C 1' cor!orate tax I 1' K14 !rices C 1' Contractionary MP i/r, SsM Sellin" %onds, increasin" t#e reser.e ratio S#ow #ow 1' falls .ia t#e indirect transmission mec#anism 0 ma( affect PE0 9#ic# !art of 0 to c t : socio!olitical factors 6ow m c# of 0 to c t s c# t#at t#e red ction in 1' will %e si"nificant eno "# to com%at inflation It ma( %e rele.ant to note t#at C#ina is in t#e midst of !re!arin" for t#e <ei$in" Jl(m!ics and 0 cannot $ st %e s ddenl( decreased& income tax ma( #inder !rod cti.it( 3disincenti.es for wor85 cor!orate tax ma( #inder PE0

Supply-side policies Man!ower !olicies Im!ro.e t#e efficienc( of t#e la%o r mar8et <etter matc#in" of wor8ers to $o%s Red ce la%o r mar8et im%alances Income !olicies 9a"e " ide!osts : t#at 9 matc#es !rod cti.it( S !!l( side economics Increasin" 1S- trainin", retrainin", ed cation

1%ilit( to effect a fall in 1' is affected %( t#e interest elasticit( of t#e MEI 3 s all( interest inelastic5 Non>interest factors- #i"# % siness confidence wo ld limit t#e fall in 1'& Ra!id "rowt# and lar"e !otential for "rowt# in C#ina means t#at in.estors are not deterred %( #i"# i/r and will contin e to in.est 1ffl ence no need for loans to ma8e ! rc#ases i/r ma( not affect t#e wealt#( <rin" in t#e t#eor( of t#e im!ossi%le trinit(

7or man!ower !olicies- s8ills of t#e nN ma( not matc# t#ose re/ ired %( firms : #ence s !!l(>side economics

S c# !ro"rammes #a.e to %e f nded %( 0 : net effectL

Evaluative comment(s) Note conflicts li8e dam!ened E0& Reco"niCe #ow m lti!le mana"ement !olicies wo ld !ro%a%l( #a.e to %e im!lemented in order to s ccessf ll( co nteractin" t#e o.er#eated econom(