Wajeeha Nadeem A. Pep Assignment 2 5th July,2023 Why do we refer to fiscal policy as "Resource Mobilization Policy"? Fiscal policy is often referred to as "Resource Mobilization Policy" because it focuses on the government's role in mobilizing and managing financial resources within an economy. It involves the use of government spending, taxation, and borrowing to influence the overall level of economic activity, promote stability, and achieve specific economic objectives. Here are the reasons why fiscal policy is considered a resource mobilization policy: Revenue Generation: Fiscal policy involves the collection of government revenue through various sources, primarily taxation. By imposing taxes on individuals, businesses, and goods, the government mobilizes financial resources that can be used to fund public expenditure, infrastructure development, social programs, and other essential services. Through revenue generation, fiscal policy plays a crucial role in mobilizing resources to finance government activities. Redistribution of Resources: Fiscal policy also aims to ensure a fair distribution of resources within a society. By implementing progressive taxation systems, the government can collect a larger proportion of income from high-income individuals and redistribute it to provide benefits and support to lower-income segments of the population. This redistribution of resources helps reduce income inequality and promote social welfare. Allocation of Resources: Fiscal policy plays a significant role in allocating resources to different sectors of the economy. Through government spending, the fiscal policy can prioritize investment in infrastructure, education, healthcare, defense, and other key areas. By allocating resources strategically, fiscal policy can stimulate economic growth, address market failures, and promote long-term development. Stabilization of the Economy: Another aspect of fiscal policy as a resource mobilization policy is its role in economic stabilization. During economic downturns or recessions, fiscal policy can be used to mobilize resources to stimulate aggregate demand and boost economic activity. This can be achieved through measures like increased government spending or tax cuts to encourage consumption and investment, thus mobilizing resources towards productive sectors of the economy. Debt Management: Fiscal policy includes the management of government borrowing and debt. Governments often resort to borrowing to finance budget deficits or fund long-term projects. Effective fiscal policy ensures the prudent management of public debt to prevent unsustainable levels of borrowing, reduce reliance on external funding, and maintain fiscal discipline. This aspect of fiscal policy helps ensure efficient mobilization and utilization of financial resources. In summary, fiscal policy is referred to as "Resource Mobilization Policy" because it encompasses various measures to mobilize, allocate, and manage financial resources within an economy. It involves revenue generation, redistribution, resource allocation, economic stabilization, and debt management. By strategically utilizing fiscal tools, governments aim to mobilize resources to achieve economic and social objectives, promote sustainable development, and address societal needs. B. what do we mean by "Economic Policy Coordination"? Explain by example. "Economic policy coordination" refers to the cooperative efforts undertaken by multiple countries or economic entities to align their economic policies and actions to achieve mutually beneficial outcomes. It involves harmonizing policies, sharing information, and coordinating actions to address common challenges, promote stability, and enhance overall economic performance. Wajeeha Nadeem Pep Assignment 2 5th July,2023 An example of economic policy coordination is seen in the European Union (EU) through its coordination of fiscal and monetary policies among member states. The EU's Economic and Monetary Union (EMU) is a prime example of economic policy coordination. Fiscal Policy Coordination: The EU member states that adopted the euro as their currency participate in the coordination of fiscal policies through the Stability and Growth Pact (SGP). The SGP sets fiscal rules and guidelines to ensure sound fiscal management, avoid excessive deficits, and promote fiscal discipline. Member states are required to submit their national budgets and fiscal plans to the European Commission for assessment and coordination. For example, if a member state's budget plan indicates a high deficit or deviation from the agreed-upon fiscal targets, the European Commission can provide recommendations for corrective measures. This coordination aims to prevent fiscal imbalances, promote responsible fiscal policies, and maintain stability within the eurozone. Monetary Policy Coordination: The European Central Bank (ECB) is responsible for formulating and implementing monetary policy for the eurozone. The ECB's monetary policy decisions, including interest rates and liquidity provision, are coordinated to achieve price stability and support economic growth across the member states. Through regular meetings and consultations, the ECB coordinates its monetary policy stance with the national central banks of the eurozone. The coordination ensures a consistent approach to monetary policy, taking into account the diverse economic conditions and challenges faced by different member states. This coordination helps maintain monetary stability and fosters economic convergence within the eurozone. Overall, the economic policy coordination in the EU aims to harmonize fiscal and monetary policies, foster economic integration, and enhance economic stability and growth. It recognizes that the interdependence of economies necessitates cooperation and coordination to address common challenges and achieve collective objectives. In addition to the EU example, other forms of economic policy coordination can be observed among international organizations like the G20, where member countries collaborate to address global economic challenges, promote trade, and coordinate policies to foster global economic stability and development. C. How may we use" Elasticity of Tax" to assess if there has been an increase/ decrease in the size of the black economy? The concept of "elasticity of tax" can be utilized to assess the potential impact of changes in the size of the black economy on tax revenue. Elasticity of tax refers to the responsiveness of tax revenue to changes in the tax base or tax rates. By analyzing changes in tax revenue in relation to changes in economic activity, it is possible to infer the presence of an increase or decrease in the size of the black economy. Here's how this assessment can be conducted: Wajeeha Nadeem Pep Assignment 2 5th July,2023 Tax Revenue Analysis: The first step is to analyze tax revenue trends over a specific period. This involves examining the actual tax revenue collected by the government, particularly from sectors or activities that are susceptible to black market transactions. It is essential to consider the tax revenue in relation to the overall economic activity and changes in tax rates during the period under review. Elasticity Calculation: Once the tax revenue data is gathered, the elasticity of tax can be calculated. The elasticity of tax can be measured using the formula: Elasticity = (% change in tax revenue) / (% change in tax base or tax rate). In this case, the tax base refers to the taxable economic activity associated with the black economy. By comparing the change in tax revenue with the corresponding change in the tax base, it is possible to estimate the elasticity of tax. Interpretation: The elasticity of tax provides insights into the responsiveness of tax revenue to changes in economic activity associated with the black economy. If the estimated elasticity of tax is high (greater than 1), it suggests that tax revenue is sensitive to changes in the tax base. A significant decrease in tax revenue compared to the decrease in the tax base indicates that a larger portion of economic activity is moving into the black economy, resulting in reduced tax compliance. On the other hand, if the elasticity of tax is low (less than 1), it implies that tax revenue is relatively less responsive to changes in the tax base. This could indicate a smaller impact of the black economy on tax revenue, suggesting a smaller size of the black economy or a more effective tax collection system. Consideration of Other Factors: It is important to note that changes in tax revenue and elasticity of tax may also be influenced by factors other than the black economy, such as changes in tax policy, business cycles, legal reforms, or shifts in economic structure. Therefore, a comprehensive analysis should take into account these factors and attempt to isolate the impact of the black economy on tax revenue. In summary, the elasticity of tax can provide insights into the potential changes in the size of the black economy by examining the responsiveness of tax revenue to changes in the tax base. However, it is crucial to consider other factors and conduct a thorough analysis to draw accurate conclusions about the presence and magnitude of changes in the black economy.
