This is an essay evaluating the impact of reflationary demand-side policies on an economy of your choice. (25 marks) The country I chose is Hong Kong, and I got 25/25 for this essay.
Demand side policy questions
Evaluate the impact of reflationary demand-side policies on an economy of your
choice. (25 marks)
Demand side policies refers to two categories, namely fiscal policy and monetary policy.
A fiscal policy is the deliberate manipulation of taxation and government expenditure to
achieve macroeconomic aims through shifting AD. While a monetary policy is the deliberate
manipulation of interest rate and money supply to influence AD.
The country I chose was Hong Kong. Hong Kong’s economy risks being plunged deeper into
recession due to covid 19. Consumers were afraid of the transmission of COVID, they
panicked to buy goods outside. With a great fall in consumption, firms and industries had
been reducing prices to get people consuming their products. By this, real GDP has fallen by
9% year-on-year, both price level and output level dropped. At the same time, there has
been a high employee turnover rate. Due to the outbreak of the 4th wave covid-19, Hong
Kong’s unemployment rate went up to 6.6%, reaching the highest in 16 years. To tackle the
deflationary gap, the HK government executed expansionary fiscal policy to support
businesses and individuals. Whereas to alleviate deflationary pressure, there is an
expansionary monetary policy, where the HKSAR decides to lower the interest rate.
An expansionary fiscal policy is where the government that reduces tax and regulations or
increases government spending so as to close the negative output gap. Having fiscal
stimulus, the Hong Kong government is increasing spending on healthcare services through
giving 7 million people $1,200 in cash to boost its recession-hit economy. Moreover, it is
estimated that such a stimulus programme is estimated to be worth more than $15 billion.
This shows that there is a significant rise in government spending, it pushes AD. Income
taxes are also being cut for some households and residents of public housing are being
given a one month rent holiday in a bid to lift disposable income and support consumer
spending. Such that households will have to pay less income, it will increase investment and
consumption of firms and households. Therefore, having fiscal stimulus,C, I, G rises, AD
increases, the negative output gap can be closed and HK may recover from recession.
There may be a multiplier effect. When there is an increase in government subsidy, G goes
up and injection rises, GDP will increase by a larger effect as the injection will pass around
the circular flow model of income many times, AD rises by many times. (k = Δin GDP/ Δin
injection). As a result, the size of the multiplier will be significant.
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