PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 1

 CHAPTER 9
PUBLIC POLICIES

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 2
 ECONOMIC FUNCTION OF
GOVERNMENT
IMPORTANT FUNCTIONS OF GOVERNMENT

Adjust the allocation of resources

Assist private sector to ensure economic stabilization

Create a business environment

Redistribute income and wealth among the

population

Provide a legal and social framework for the

effective operation of an economy

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 3
 TYPES OF BUDGET

1. BALANCED 2. SURPLUS DEFICIT

3.
BUDGET BUDGET BUDGET
   

The government’s The government’s The government’s

total expenditure total expenditure total expenditure
is equal to its is less than its is more than its
total revenue. total revenue. total revenue.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 4
 GOVERNMENT REVENUE

TAX REVENUE NON-TAX REVENUE

SOURCES OF
REVENUE

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 5
 TYPES OF TAXES

DIRECT TAXES
• Tax paid by the person on whom it is levied which
cannot be passed on to another person.

TYPES OF TAXES

INDIRECT TAXES
• Burden of tax can be passed on to another
person.
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 6
 GOVERNMENT EXPENDITURE

GOVERNMENT OPERATING
EXPENDITURE

Pensions Grants &

Emolumen Service Transfers
&
charges
gratuities

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 7
 Source: Federal Government Expenditure Report

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 8
  GOVERNMENT DEVELOPMENT
EXPENDITURE

General Defense and

administration Social Economic security
services services

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 9
 Source: Federal Government Expenditure Report

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 10
 PUBLIC DEBT

The debt which a government

owes to its nationals
of other countries.

INTERNAL EXTERNAL
SOURCES
SOURCES SOURCES
OF
PUBLIC
DEBT

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 11
 INTERNAL AND EXTERNAL
SOURCES
 INTERNAL
1. Borrowing from citizen
2. Borrowing from financial institutions
3. Loans from the central bank
4. Loans from commercial bank
 EXTERNAL
1. International money market
2. Currency loans from foreign government
3. Loans from international financial institutions

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 12
 Source: Federal Government Debt Management Report

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 13
 GOVERNMENT POLICY

MONETARY FISCAL
POLICY POLICY

Fiscal policy refers to a policy which

affects the aggregate demand by
Monetary policy is a set of tools that a altering the balance between
nation's central bank has available to government expenditure and taxation.
promote sustainable economic growth
by controlling the overall supply of Fiscal policy also deals with the
money that is available to the nation's government management of the
banks, its consumers, and its economy by varying the size and type
businesses. of economy, the type of taxation,
public debt, government expenditure
and government revenue.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 14
 EXPANSIONARY MONETARY POLICY
• Increasing money supply in the economy

TYPES OF MONETARY POLICY

CONTRACTIONARY MONETARY POLICY

• Decreasing money supply in the economy

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 15
 INSTRUMENTS OF
MONETARY POLICY

Quantitative Qualitative
Instruments Instruments

1.Open market operation

1. Selective credit
2.Legal cash reserve control
ratio requirement - Reduce unhealthy
3.Discount rate loan

-interest rate 2. Special directives

4.Funding - Restrict lending policy

- Convert short-term loan

to long term loan

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 16
 EXPANSIONARY FISCAL POLICY

TYPES OF FISCAL POLICY

CONTRACTIONARY
FISCAL POLICY

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 17
 INSTRUMENTS OF FISCAL
POLICY

1.Government expenditure
2.Taxes

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 18
 How It Works?

1. Contractionary fiscal policy

Contractionary fiscal policy is implemented when there is
an inflationary gap (occurs when the actual gross domestic
product (GDP) is above its long-run level).

The government will decrease government expenditure

and increase taxes to reduce the aggregate demand.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 19
 Expansionary fiscal policy
Expansionary fiscal policy is implemented when
there is a deflationary or recessionary gap (occurs
when the actual GDP is below its long-run level)
The government will increase government
expenditure and decrease taxes to increase
aggregate demand.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 20
 Roles of Fiscal Policy

 Fiscal policy is implemented to counter the effects of booms and

slumps, and to maintain economic stability.
 It is used to prevent an economy experiencing a prolonged recession, such as
during the financial crisis in 1997 and 1998 and the debt crisis in 2008.
 Fiscal policy can raise the general level of real income and aggregate demand.
 In addition, the fiscal policy is also used to curb inflation, such as
during the oil crisis in the 1970s.
 Fiscal policy is implemented to smoothen the fluctuations in the economy
associated with the business cycle. This involves reducing government
expenditure or raising taxes when the economy is on the verge of overheating.
 Conversely, at the onset of recession, as problems of unemployment and
declining output worsen, the government shall cut taxes or raise government
expenditure to boost its economic activities.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 13– 21