NAMA AHLI :

NOR FARAHIN NATASHA

NUR HIQMAH BIN NOORLODIN
NURUL HIQRAH BINTI RODIA
ANDREASEAR LESTER
KEYLLSON ANNEL FELIX

If the Malaysian economy fell into a serious recession, what could the
government do to counter act that recession? Specifically, explain how could
it use each of its tools..?

I.
II.
III.
IV.

Each group should discuss the above problem with your group member.
Base one the discussion you are required to prepare a presentation to solve
the above problems.
As your guidelines, you can refer books, Websites and also can discuss with
your lecturer.
Each group given 10 minutes to present their idea regarding this above
problem.
ANSWER :When the economy begins to suffer from serious recession or
inflation, politicians will almost always intervene to try to improve the
situation. Their interventions may or not be good economicsoften they're
not!but you can hardly blame the politicians for trying. Nobody wants to go
down in history like Herbert Hoover, the president who became a widely
hated figure for failing to use the government aggressively enough to try to
end the Great Depression.
Politicians hoping to improve economic conditions have two main tools at
their disposal. Fortunately for them (and thus for the rest of us), the basic
principles behind them are pretty simple. The core thinking is that inflation
and recession are opposites of one another. During periods of recession there
is not enough money circulating in the economy. During periods of inflation,
there is too much. So the answer to these problems is to either put money in
or take money out of the economy.
At this point, economists begin to disagree over who should do the putting in
or taking out, and which means should be used to do so. Some favor fiscal
policyadjusting taxes and government spending. But most prefer monetary
policyadjusting interest rates and reserve requirements, and buying or
selling bonds.
Fiscal policy is set by the president and Congress; they create the tax system
and they decide how the government should spend its money each year. The
basic premises behind much of contemporary fiscal policy were introduced by
British economist John Maynard Keynes during the Great Depression. Keynes
argued, contrary to conventional thinking, that the market and the economy
could not regulate itself. During periods of recession, consumers hold on to
their money rather than spending it. Businesses were similarly afraid to

NAMA AHLI :
NOR FARAHIN NATASHA
NUR HIQMAH BIN NOORLODIN
NURUL HIQRAH BINTI RODIA
ANDREASEAR LESTER
KEYLLSON ANNEL FELIX

expand operations and hire more workers. Therefore, the government needed
to jump-start the economy by injecting some money into it. The tools for
doing so were tax rates and government spending. By lowering taxes people
had money to spend; they could buy cars and appliances, or convert their
garage into a game room. All of this put people to work stimulating even
more spending and job growth. By increasing government spending, the
government put money directly into the economy. Building a dam, extending
unemployment benefits, or hiring more teachers also put money into
circulation and, according to Keynesian fiscal theory, stimulated economic
growth.
FISCAL POLICY IMPACT ON AGGREGATE DEMAND
Keynes argued that during periods of recession aggregate demand (AD)the
total demand of
consumers, businesses, and government at various price levelsneeded to
be stimulated through government action. Through tax cuts and
increased government spending, aggregate demand (AD1) would be
increased (AD2).
Of course, it gets more complicated than this. For starters, policymakers now
debate whose taxes should be cut during periods of recession. Traditional
Keynesian fiscal policy emphasizes putting money into the hands of
middle and lower-class consumers, thereby stimulating the demand
side of the economy. Others argue that more permanent growth is
achieved by cutting business and corporate taxes, and by reducing
capital gains taxes and personal income tax rates for wealthier
taxpayers. According to these supply-side theorists, the money
saved through these sorts of tax cuts will be reinvested in new
businesses and large-scale expansion, thus generating more jobs.
Regardless of whose taxes you cut, however, this course of action may lead
to government budget deficits--that is, government spending may exceed
government income. In response, some argue that short-term deficits are
acceptable since once the economy starts to grow, tax revenues will increase.
Others argue that deficits saddle future generations with debt and lead to
high interest rates, crippling future growth.
FISCAL POLICY OPTIONS

To Fight Recession:
-

REDUCE TAXES

NAMA AHLI :
NOR FARAHIN NATASHA
NUR HIQMAH BIN NOORLODIN
NURUL HIQRAH BINTI RODIA
ANDREASEAR LESTER
KEYLLSON ANNEL FELIX

INCREASE GOVERNMENT SPENDING

To Fight Inflation:
-

Increase taxes
Reduce government spending

SUMBER DIPEROLEHI DARIPADA :

IMD - www.imd.ch-HOW TO DEAL WITH RECESSION
Seven recommendations
By Professor Paul Strebel - November 2008