Note: The Principal Economics Tutor will discuss fiscal policy in greater detail in the economics tuition class. Assuming aggregate demand and hence the general price level is rising rapidly, this will reduce the growth of aggregate demand which will lead to a slower rise in the general price level resulting in lower inflation. A decrease in consumption expenditure, investment expenditure and government expenditure on goods and services will lead to a decrease in aggregate demand. In addition to a decrease in consumption expenditure, an increase in corporate income tax will lead to lower expected after-tax returns on planned investments resulting in a decrease in investment expenditure. It can also decrease disposable income to decrease consumption expenditure by increasing direct taxes such as personal income tax and corporate income tax or decreasing transfer payments. For example, many European governments reduced expenditure on goods and services in the early 1980s to reduce inflation caused by the sharp rise in oil prices. To reduce inflation, the government can decrease expenditure on goods and services. An increase in national output will lead to a rise in the demand for labour in the economy resulting in a fall in unemployment. When firms increase production, they will employ more factor inputs from households and hence will pay them more factor income which will lead to an increase in national income.

An increase in consumption expenditure, investment expenditure and government expenditure on goods and services will lead to an increase in aggregate demand which will induce firms to increase production resulting in an increase in national output. In addition to an increase in consumption expenditure, a decrease in corporate income tax will lead to higher expected after-tax returns on planned investments resulting in an increase in investment expenditure. It can also increase disposable income to increase consumption expenditure by decreasing direct taxes such as personal income tax and corporate income tax or increasing transfer payments. For example, the Singapore government implemented the Resilience Package which included an increase in expenditure on infrastructure to increase economic growth in the 2008-2009 Global Financial Crisis. To increase economic growth or decrease unemployment, the government can increase expenditure on goods and services. There are two demand-side policies: fiscal policy and monetary policy.įiscal policy is a demand-side policy that is used to control government expenditure or taxation to influence aggregate demand. 2 DEMAND-SIDE POLICIES: FISCAL POLICYĭemand-side policies are policies that are used to influence aggregate demand. This chapter provides an exposition of macroeconomic policies. As these problems have adverse consequences for the economy, the government will use macroeconomic policies to solve the problems.

In the event that the macroeconomic goals of the government are not achieved, macroeconomic problems will occur which include low or negative economic growth, high unemployment, high inflation and a persistent balance of payments disequilibrium.

However, these goals may not be achieved due to domestic factors, external factors or both. Recall that the government has four macroeconomic goals: high economic growth, low unemployment, low inflation and a balance of payments equilibrium. The book is available in the major bookstores in Singapore. Students can refer to Economics – A Singapore Perspective for the diagrams. MACROECONOMIC POLICIES will be covered in economics tuition in the first, second, third and fourth weeks of term 2.

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