Sample (Economic Policy assignment )

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MELBOURNE, Australia - April 22, 2014 - PRLog -- Economics Assignment

         Economic Policy of Malaysian Economy: Fiscal Deficit Impact


Student Number:




Referencing Style: APA

Table of Contents

Summary. 2

Explanation. 2

References. 8

Appendix. 9

The Malaysian government has announced that it will cut down the expenditure on the subsidies specifically fuel subsidies. However, the government is also aiming to cut down on sugar subsidy. Besides, reducing the subsidies, the government of Malaysia has announced the implementation of goods and service tax (GST) by the year 2015. This decision has been backed by the International Monetary Fund so that the Malaysian government reduces the level of fiscal deficit. The goal of the Malaysian government is to reduce the deficit to the level of four percent. As per the IMF chief for Malaysia, the implementation of GST as well as reduction in subsidy is very important and it is a timely reform as well. In the past, there has been price hikes as well as subsidy cuts, but both of these steps were criticized by the citizens of Malaysia. As per the citizens, these steps could have been taken gradually by the government and this could have an effect on the political elections that were soon going to take place. The treasury secretary said that in the short run there will be negative impact on the economy but in the long run the situation will improve making the economy better.

A decline in the aggregate demand causes the real output to decline and the price level to decline. Although the fiscal deficit reduces, there is a decline in the output of the entire country.

The other ways to reduce the fiscal deficit includes increasing the tax revenue. By increasing the tax collected from the individuals of the country, the government can increase the revenue component of the fiscal deficit, thereby reducing the fiscal deficit of the country. However, increase in the tax rate reduces the fiscal deficit but it also lowers the economic growth as the level of output declines in the economy. The other method to reduce the fiscal deficit includes the bailout by other countries. Bailout refers to the help offered by the government of other countries to the country facing economic problems such as fiscal deficit. By doing so, the debt component of the government increases along with the interest obligations. This adds more burden on the government of the economy. However, when all the above methods fail, government of the countries having high fiscal deficit resort to monetization. Monetization refers to the printing of money causing increase in the money supply. The increase in money supply causes reduction in the fiscal deficit of the economy but it also leads to the inflation in the economy. The inflation is the major drawback associated with the monetization process of reducing the fiscal deficit. In the case of the monetization, central bank buys the government bonds and provides the funds to the government by the process of printing money. Thus, these are the ways in which the government can reduce the fiscal deficit (Umunna et al, 2011)

The IMF provides financial assistance to the countries which are in economic difficulties. IMF has backed such a decision by the Malaysian government as the economic condition of the Malaysian economy will improve once the government resorts to reduction in the fiscal deficit (Plante, 2013).

The Malaysian government is also considering implementing the goods and service tax (GST) in the coming years to reduce the fiscal deficit. Goods and service tax is similar to the value added tax. At every stage of production, there is a tax on the input used by the suppliers. However, the tax can be claimed as the input used in the previous stage of production has already been taxed. An implementation of goods and service tax will increase the revenue component of the fiscal deficit. An increase in the revenue through tax revenue, the fiscal deficit will reduce in the economy. The impact of the GST will be seen once it is implemented. This is also a part of the fiscal policy initiative that has been taken by the Malaysian government. Subside reduction will show the immediate effect whereas the goods and service tax when implemented will produce the desired effect on the fiscal deficit.

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