PRINCIPAL ECONOMY (dqs136)
LECTURER : Pn. Norazlin Bt Mat
PRESENT BY :
Nurul Aznieta Bt Sharif
Zulaikha Bt Elias
Nur Hielyana Bt Ibrahim
Norazima Bt Sajali
Fiscal policy is the means by which a
government adjusts its spending levels and
tax rates to monitor and influence a
it was determined that the government
had to take a proactive role in the economy
to regulate unemployment, business cycles,
inflation and the cost of money.
There are two types of fiscal policy
practised by a government.
Expansionary fiscal policy
• The expansionary fiscal policy is adopted to
overcome unemployment or recession
• The government will increase public
spending by undertaking public works and
Contractionary fiscal policy
• The contractionary fiscal policy is adopted
to overcome inflationary problem.
• During inflation, the contraction fiscal
policy is to create a budget surplus in order
to reduce aggregate spending.
AFFECT ON CREDIT
on this process, the increase in economic
productivity can cross over a very fine line
and lead to too much money in the market.
This excess in supply decreases the value of
money while pushing up prices.
fine tuning the economy through fiscal
policy alone can be a difficult, if not
improbable, means to reach economic goals.
If not closely monitored, the line between a
productive economy and one that is
infected by inflation can be easily blurred.
The Economy Needs
to be Curbed
When inflation is too strong,
government can use fiscal policy to increase
taxes to suck money out of the economy.
Fiscal policy could also dictate a decrease in
government spending and thereby decrease
the money in circulation.
the possible negative effects of such a policy
in the long run could be a sluggish economy
and high unemployment levels.
the process continues as the government
uses its fiscal policy to fine-tune spending
and taxation levels.
Affect Fiscal policy
The effects of any fiscal policy are not the
same for everyone.
Depending on the political orientations and
goals of the policymakers, a tax cut could
affect only the middle class, which is
typically the largest economic group.
But, when a government decides to adjust
its spending, its policy may affect only a
specific group of people.
Can be defined as a continuous increase in
the general price level of goods and services
in the economy.
When a persistent increase occurs in the
level of prices that lowers the purchasing
power of money, we call it inflation.
Inflation is also a situation where there is
‘too much money chasing too few goods’.
CAUSE OF INFLATION
When too much money is in circulation in
comparison to the production of goods and
services, then inflation occurs.
The consequences is the fall of purchasing
power of money.
During inflation, general price rise means
that the cost of living going up
Various measures can be taken to reduce
general price inflation to overcome or
reduce the rate of inflation.
How Fiscal Policy is
implemented in Malaysia
as a measure to control
Reduce the level of government purchases
Government purchases are expenditures by
the government sector, especially those by
the federal government, on final goods or
It is that portion of gross domestic
product purchased by governments.
The actual purchases are typically
undertaken by individual government
Contractionary Fiscal Policy involves a
decreases in the funds appropiated to these
assorted agencies. The agencies the reduce
their purchases which decreases aggregate
productiom, imcome, and the rate of
A reduction in gov. expenditure will directly
affect aggregate demand.
The government will cut the salary of all
civil servants and postpone its development
projects to reduce the purchasing power of
Increases in taxes
Taxes are the involuntary payments that the
government sector imposes on the rest of the
economy to generate the revenue needed.
The increase in taxes provides the household
sector with less disposable income that can be
used for consumption expenditures.
While tax changes tend to be administratively
easier to implement than government
purchases, they are less political palatable to
political leaders and voters who prefer lower
taxes to higher taxes.
A highly regressive text structure can
successfully reduce the impact of inflation on
Decrease in transfer payment
Transfer payments are payments made by
the government sector to the household
sector with no expectations of productive
activity in return.
transfer payments rely on a payment
schedule based on qualifying characteristics of
The decrease in transfer payments reduces
the disposable income available to the
household sector, which then forces a
reduction in consumption expenditures,
leading to less aggregate production and
employment and subsequently a decrease in