Tiffany Ng 5B (27)
F.5 Economics 2012 Budget Analysis
1. Supporting Enterprises (paragraph 41.2)
(a) This proposal suggested reducing the profits tax for 2011-12 by 75%, subject to a ceiling of
$12,000. All taxpayers (about 120,000) who are liable to profits tax will benefit from the
proposal.
(b) This proposal helps enterprises to reduce tax payment which encourages more investment
and the entry of new firms, especially small and medium enterprises.
(c) Reducing profits tax encourages more investments and the entry of new firms. AD=
C+I+G+(X-M). Aggregate demand increase (shift right from AD1 to AD2). In the short run,
price level rises (from P1 to P2) and real actual GDP (Y) rises (Y1 to Y2). An inflationary gap is
resulted as actual Y (Y2) is greater than potential Y (Yf).
There is excess demand of output and inputs. In the long run, short run effects disappear
and input costs rise. Short run aggregate supply falls (shift left from SRAS1 to SRAS2). This
causes the price level to rise further (from P2 to P3) while the real actual GDP (Y2) returns to
original level (Yf).
Assume Hong Kong is now in full employment,
P
LRAS
SRAS2
SRAS1
P3
P2
P1
Inflationary gap
0
AD1
AD2
Y
Y1
(Yf)
Y2
2. Preserving Employment (paragraph 48)
(a) This proposal suggested that the government would inject $100 million into the Enhancing
Employment of People with Disabilities through Small Enterprises Project, under which funding
is granted to non-government organizations to set up small enterprises employing people with
disabilities.
(b) This proposal encourages the setting up of more small enterprises which will employ people
with disabilities. These people will enter the labour force. Human resources and the maximum
production capacity of the economy may increases.
(c) As people with disabilities will be employed, employed population increase and there is an
increase in human resources. The maximum production capacity increases. Both long run
aggregate supply (LRAS) and short run aggregate supply (SRAS) increase. (LRAS shifts right from
LRAS1 to LRAS2 while SRAS shifts right from SRAS1 to SRAS2). In addition, the government will
also inject % 100 million into the project. This increases government consumption expenditure
demand. Hence, AD also increase. (shifts right from AD1 to AD2)
In the short run, price level will falls (from P1 to P2) while real actual GDP (Y) rises (from Y1 to
Y2). A deflationary gap is resulted as the actual Y is greater than the potential Y (Yf2).
There is an excess supply of output and inputs. In the long run, short run effects disappear and
input costs fall. Short run aggregate supply rises (shift right from SRAS2 to SRAS3). The price
level falls further (from P2 to P3) while the real actual GDP (Y) rises further to Yf2.
Assume Hong Kong is now in full employment,
P
LRAS1
LRAS2
SRAS1
SRAS2
SRAS3
P1
P2
P3
Deflationary gap
0
AD2
AD1
Y
Y1
(Yf1)
Y2
Y3
(Yf2)