Contractionary
Fiscal
policy
To
achieve
low
and
stable
inflation
by
reducing
General
Price
Level
Government
can
introduce
Demand
Management
Policy
such
as
Contractionary
Fiscal
policy.
Government
can
decrease
the
Government
expenditure
(G)
on
final
goods
and
service
such
as
education
and
healthcare
which
directly
decrease
Aggregate
demand.
Government
can
increase
direct
Taxes
such
as
Personal
Income
Tax
and
Corporate
Tax
which
decrease
Disposable
Income
and
Post-Tax
Profit.
Households
becomes
less
willing
and
able
to
consume
and
Firms
become
less
willing
and
able
to
invest,
causing
Consumption
(C)
&
Investment
(I)
to
decrease.
When
G,
C
&
I
decrease,
Aggregate
Demand
will
decrease
as
AD=C+I+G+(X-M)
When
Aggregate
Demand
decrease,
AD
curve
will
shift
left,
causing
an
unplanned
surplus
of
inventories
at
the
original
general
price
level.
The
unplanned
surplus
will
lead
to
a
downward
pressure
on
general
price
level
as
firms
clear
their
stock,
as
general
price
level
decreases,
real
national
output
will
decrease.
As
real
output
decreases,
firms
may
demand
and
employ
lesser
factors
of
productions
such
as
labour.
Therefore,
Contractionary
Fiscal
policy
will
lead
to
a
recession
as
Real
National
Income
will
decrease
via
the
multiplier
effect,
General
Price
Level
will
decrease
and
Unemployment
Rate
MAY
increase,
especially
Cyclical
unemployment.
Contractionary
fiscal
policy
is
that
it
may
lead
to
improving
of
Balance
of
Payment
as
decrease
in
real
national
income
and
employment
will
decrease
the
demand
for
imports,
and
decreasing
GPL
will
decrease
the
demand
for
imports
and
increase
exports,
all
causing
the
improvement
of
Balance
of
trade
and
balance
of
payment.
The
strength
of
fiscal
policy
is
that
it
may
have
the
shortest
time
lag
as
Government
expenditure
is
a
component
of
AD.
Another
strength
of
fiscal
policy
is
that
it
may
improve
budget
deficit
or
improve
government
debt
as
there
is
a
decrease
government
spending
combined
with
increase
in
tax
revenue
collected.
Another
strength
of
fiscal
policy
is
that
it
will
lead
to
lower
of
general
price
level,
reducing
the
inflationary
pressure.
Limitation
of
Contractionary
fiscal
policy
is
that
it
may
lead
conflict
of
macroeconomic
aims
or
economic
growth
and
low
unemployment
which
will
worsen
the
standard
of
living
of
the
population.
Write
the
Correct
stuff
at
the
Correct
Time
Mr
Benjamin
Thong
|
Macroeconomic
Policies
Inflation
Contractionary
Monetary
policy
To
achieve
low
and
stable
inflation
by
reducing
General
Price
Level
Government
can
introduce
Demand
Management
Policy
such
as
Contractionary
Monetary
policy
through
the
Central
Bank.
The
Central
Bank
can
decrease
the
Money
Supply
within
the
Economy
through
Open
Market
Operations
of
selling
Treasury
Bills
and
Bonds,
decrease
Bank's
Reserve
Ratio.
When
Money
Supply
decreases,
Interest
rate
increases
as
banks
has
less
money
to
be
loaned
out.
Central
Bank
can
increase
the
domestic
Interest
Rate
directly.
Increase
in
Interest
Rate
means
that
the
Cost
of
Borrowing
and
Reward
to
Savings
has
increased.
Households
becomes
less
willing
and
able
to
consume
&
Firms
become
less
willing
and
able
to
invest,
causing
Consumption
(C)
&
Investment
(I)
to
decrease.
When
C
&
I
decrease,
Aggregate
Demand
will
decrease
as
AD=C+I+G+(X-M)
When
Aggregate
Demand
decrease,
AD
curve
will
shift
left,
causing
an
unplanned
surplus
of
inventories
at
the
original
general
price
level.
The
unplanned
surplus
will
lead
to
a
downward
pressure
on
general
price
level
as
firms
clear
their
stock,
as
general
price
level
decreases,
real
national
output
will
decrease.
As
real
output
decreases,
firms
may
demand
and
employ
lesser
factors
of
productions
such
as
labour.
Therefore,
Contractionary
Monetary
policy
will
lead
to
a
recession
as
Real
National
Income
will
decrease
via
the
multiplier
effect,
General
Price
Level
will
decrease
and
Unemployment
Rate
MAY
increase,
especially
Cyclical
unemployment.
Contractionary
Monetary
policy
is
that
it
may
lead
to
improving
of
Balance
of
Payment
as
decrease
in
real
national
income
and
employment
will
decrease
the
demand
for
imports,
and
decreasing
GPL
will
decrease
the
demand
for
imports
and
increase
exports,
all
causing
the
improvement
of
Balance
of
trade
and
balance
of
payment.
The
strength
of
Monetary
policy
is
that
it
it
will
lead
to
lower
of
general
price
level,
reducing
the
inflationary
pressure.
Another
strength
of
Monetary
policy
is
that
the
financial
market
will
decide
how
much
AD
will
change.
Another
strength
of
contractionary
Monetary
policy
is
real
national
income
will
increase
more
than
proportionate
to
the
initial
increase
in
AD
due
to
the
multiplier.
Another
limitation
of
contractionary
Monetary
policy
is
that
it
may
not
lead
to
desired
decrease
in
AD.
Limitation
of
contractionary
Monetary
policy
is
that
it
may
lead
conflict
of
macroeconomic
aims
or
economic
growth
and
low
unemployment,
it
may
lead
worsening
of
standard
of
living
of
the
population.
Write
the
Correct
stuff
at
the
Correct
Time
Mr
Benjamin
Thong
|
Macroeconomic
Policies
Inflation
Appreciation
of
Exchange
Rate
To
achieve
low
and
stable
inflation
by
reducing
General
Price
Level
Central
Bank
can
appreciate
the
country's
Exchange
Rate
in
the
foreign
exchange
FOREX
market
by
buying
Domestic
currency
using
Foreign
currencies.
When
a
currency
appreciated,
it
means
that
the
same
amount
of
that
currency
can
only
buy
more
amount
of
Foreign
currencies,
or
less
of
that
currency
is
required
to
buy
the
same
amount
of
Foreign
currencies.
The
same
idea
applies
to
Goods
and
Services
in
terms
of
imports
and
exports.
Export
becomes
relatively
more
expensive
for
the
foreign
countries,
Export
volume
decrease.
Import
becomes
relatively
cheaper
than
domestic
goods
and
services,
Import
volume
increases.
Assuming
Marshall-Lerner
Condition
(PEDX+M
>1)
holds,
Net
Exports
(X-M)
will
decrease
When
(X-M)
decrease,
Aggregate
Demand
will
decrease
as
AD=C+I+G+(X-M)
When
Aggregate
Demand
decrease,
AD
curve
will
shift
left,
causing
an
unplanned
surplus
of
inventories
at
the
original
general
price
level.
The
unplanned
surplus
will
lead
to
a
downward
pressure
on
general
price
level
as
firms
clear
their
stock,
as
general
price
level
decreases,
real
national
output
will
decrease.
As
real
output
decreases,
firms
may
demand
and
employ
lesser
factors
of
productions
such
as
labour.
Therefore,
Appreciation
of
Exchange
Rate
will
lead
to
a
decrease
in
General
Price
Level,
recession
as
Real
National
Income
will
decrease
via
the
multiplier
effect
and
Unemployment
Rate
MAY
increase,
especially
Cyclical
unemployment.
The
strength
of
Appreciation
of
Exchange
Rate
is
that
it
does
not
contribute
to
budget
deficit
as
it
does
not
require
government
spending
or
reduction
in
tax
revenue
collected.
Another
strength
of
Appreciation
of
Exchange
Rate
is
that
it
might
reduce
imported
inflation
and
imported
factors
of
production
will
be
cheaper
and
SRAS
will
increase.
The
limitation
of
Appreciation
of
Exchange
Rate
is
that
net
exports
decrease
and
BOT
worsen,
Current
Account
worsen,
Therefore,
BOP
worsen.
The
limitation
of
Appreciation
of
Exchange
Rate
is
that
it
will
result
in
recession
as
Real
National
Income
will
decrease
via
the
multiplier
effect,
and
increase
in
Unemployment
Rate,
especially
Cyclical
unemployment.
The
limitation
of
Appreciation
of
Exchange
Rate
is
that
it
Marshall
Lerner
condition
might
not
hold.
Write
the
Correct
stuff
at
the
Correct
Time
Mr
Benjamin
Thong
|
Macroeconomic
Policies
Inflation
Supply
Management
Policy
To
achieve
low
and
stable
inflation
by
reducing
General
Price
Level
Market
Oriented
Policies
aim
at
encouraging
market
forces
to
work
freely
as
it
is
believed
that
market
forces
always
result
in
efficient
allocation
of
resources.
Interventionist
Policies
aims
at
counteract
the
deficiencies
of
the
market
by
government
intervening
in
the
market
directly.
Improve
Quality
and
Quantity
of
Factors
of
productions.
Resulting
in
the
increase
in
the
Productive
Capacity
of
the
economy,
increasing
the
full
employment
output
and
LRAS,
LRAS
curve
shift
right.
As
the
Productive
Capacity
of
the
economy
increased,
the
economy
has
achieved
Potential
Growth.
Increase
in
LRAS
will
cause
an
unplanned
surplus
of
inventories
at
the
original
general
price
level.
The
unplanned
surplus
will
lead
to
a
downward
pressure
on
general
price
level
as
firms
clear
their
stock,
as
general
price
level
decreases,
real
national
income
will
increase
as
household
increase
consumption.
As
real
output
increases,
firms
may
demand
and
employ
more
factors
of
productions
such
as
labour.
Therefore,
Supply
Management
Policy
will
lead
to
Potential
and
Actual
Growth,
reduction
in
General
Price
Level
and
Unemployment
Rate
MAY
decrease.
Supply
Management
Policy
may
lead
to
improving
of
Balance
of
Payment
decreasing
GPL
will
decrease
the
demand
for
imports
and
increase
exports,
all
causing
the
improvement
of
Balance
of
trade
and
balance
of
payment.
The
strength
of
Supply
Management
Policy
is
that
it
does
not
lead
to
conflicts
between
different
macroeconomic
goals.
Another
strength
of
Supply
Management
Policy
is
that
it
can
lead
to
sustainable
economic
growth
as
the
economy
achieve
potential
growth.
The
limitation
of
Supply
Management
Policy
is
that
it
may
have
the
long
time
lag
as
increasing
quality
and
quantity
of
factor
of
productions
and
improving
technology
might
take
time.
Another
limitation
of
Supply
Management
Policy
is
that
it
does
not
confirm
lead
to
an
increase
in
aggregate
supply.