OUM BUSINESS SCHOOL

MAY / 2023

BBEK4203
PRINCIPLES OF MACROECONOMICS

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Contents
1.0 Summary of the chosen fiscal policy article.......................................................................................................2
2.0 Discussion on how the current macroeconomic problems faced by the country can be mitigated using fiscal
policy.........................................................................................................................................................................4
a) Recession or Economic Slowdown.....................................................................................................4
b) High Unemployment...........................................................................................................................5
a) Inflation:..............................................................................................................................................6
b) Income Inequality................................................................................................................................6
c) Trade Deficits......................................................................................................................................6
3.0 Discussion on how the current macroeconomic problems faced by the country can be mitigated using
monetary policy.........................................................................................................................................................8
1. Recession or Economic Slowdown..............................................................................................................8
a) Lowering Interest Rates......................................................................................................................8
b) Increasing Money Supply...................................................................................................................8
2. High Inflation...............................................................................................................................................9
a) Increasing Interest Rates.....................................................................................................................9
b) Decreasing Money Supply..................................................................................................................9
3. High Unemployment....................................................................................................................................9
4. Financial Stability........................................................................................................................................9
4.0 Own suggestions to mitigate the current macroeconomic problems of the country.........................................11
1. Stimulating Economic Growth Through Infrastructure Investment..........................................................11
2. Implementing Job Training and Skill Development Programs..................................................................11
3. Managing Inflation Through Monetary Policy..........................................................................................11
4. Promoting Innovation and Entrepreneurship.............................................................................................11
5. Balancing Fiscal Responsibility with Social Spending.............................................................................12
5.0 Summary...........................................................................................................................................................13
References...............................................................................................................................................................14
ONLINE CLASS PARTICIPATION.....................................................................................................................15

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1.0 Summary of the chosen fiscal policy article
https://www.thestar.com.my/business/business-news/2022/10/08/eyeing-an-expansionary-
fiscal-policy

Figure 1 The Fiscal Policy

This article, published in The Star on October 8, 2022, discusses the Malaysian government's
proposed expansionary fiscal policy for 2023 (thestar., 2022). This action aims to achieve a
balance between meeting the requirements of the people and sustaining economic growth.

The proposed budget for 2023 is RM373,3 billion, which represents 20.5% of the Gross
Domestic Product (GDP) of Malaysia. This is a minor decrease from the RM385.3 billion
budget for 2022. The budget will encompass operational and development expenditures
(thestar., 2022).
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RM272.3 billion or 73.1% (compared to RM284.7 billion in 2022) of the total budget has
been allocated to OE, while RM95 billion or 25.5% (an increase from RM71.8 billion) has
been allocated to DE. Additional RM5 billion has been set aside for outstanding payments
from 2022 Covid-19 Fund commitments (thestar, 2022).

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It is anticipated that OE, which has increased considerably over the past two decades, will
decrease slightly due to a reduction in subsidies and social assistance. To consolidate its fiscal
position, the Malaysian government is conducting a Public Expenditure Review and focusing
on subsidy initiatives. This review is an endeavor to achieve fiscal sustainability over the long
term (thestar., 2022).

The largest portion of OE expenditure, 33%, is allocated to the compensation of civil servants.
This is primarily the result of special annual salary increases and the conversion of contract
officers into permanent positions, especially in the education and health sectors. Other
significant OE allocations include retirement costs, debt service costs (DSC), and grants to
statutory bodies.
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Regarding the DE, the budget is intended to promote economic growth by channeling funds to
programmes and initiatives with significant socioeconomic impacts. The majority of funds are
allocated to economic and social expenditures. A substantial portion is designated for
transportation initiatives, while the remainder will be used to redeem a maturing bond issued
by 1Malaysia Development Bhd.

In order to maintain a sustainable fiscal position, the government will review its current
expenditure practices, including subsidy programs, pension reform, spending on public-
private partnerships, financial commitments, and grants to statutory bodies. The objective is to
improve the efficiency and effectiveness of public expenditures, reduce financial leakages,
and increase financial reporting transparency.

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2.0 Discussion on how the current macroeconomic problems faced by the
country can be mitigated using fiscal policy
Fiscal policy is the use of government taxation and spending to influence an economy. It
affects the quantity of money in circulation, the level of aggregate demand, and the pattern of
resource allocation within the economy (Goshit, G. G., & Landi, J. H., 2014). To discuss how
fiscal policy can assist in mitigating macroeconomic issues we must examine two main types
such as expansionary and contractionary fiscal policy.

Figure 2 The Fiscal Policy

1. Expansionary Fiscal Policy: When a nation faces a recession, high unemployment rates,
or underutilized economic capacity, the government may employ expansionary fiscal policy.
To stimulate economic growth, this policy involves increasing government expenditure,
reducing taxes, or both (Goshit, G. G., & Landi, J. H., 2014).

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a) Recession or Economic Slowdown: Typically, a recession is marked by decreased

economic output, increased unemployment, and decreased consumer and business
expenditure. Governments can use fiscal policy expansion to combat recessions.

 Increasing Government Spending: Government spending increases the demand

for products and services directly. This can stimulate the output and employment
of the private sector. Initiating large-scale infrastructure projects. For instance, not
only creates jobs but also stimulates demand for basic materials, engineering
services, and numerous other industries.

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  Decreasing Taxes: Tax reductions increase households' disposable income, which
stimulates consumption. Tax cuts can increase retained earnings for businesses,
which can be used for investment, expansion, and employing (Goshit, G. G., &
Landi, J. H., 2014).
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