Automatic stabilization in Estara

Estara entered a recession after a decline in export demand. Its progressive income-tax system and unemployment-benefit programme changed automatically as household incomes and employment fell. The government is also considering a temporary public-works programme.

Table 1: Representative household finances

Representative household finances before and during the recession.

Table 2: Marginal propensities and proposed public works

Marginal propensities and proposed public-works expenditure in Estara.

The public-works programme would repair flood defences in regions with high unemployment. It could begin within two months, but the government is uncertain about the duration of the recession.

Fiscal policy and external balance in Deltora

Read the extracts and answer the questions that follow.

Text A — Import-led expansion

1. Strong household expenditure has increased Deltora's imports and created a large current account deficit. Real GDP is close to potential output and inflation is above target.

2. The government plans to increase indirect taxes on luxury consumption and postpone some current expenditure. Indirect taxation is expected to raise consumer prices and reduce consumption of these goods.

3. Exporters support action to stabilize the economy but fear that weaker domestic demand will reduce investment.

Table 1 — Trade in goods and services, billion dollars

Deltora's trade in goods and services.

Text B — Budget choices

1. The government has rejected cuts to transport investment because this capital expenditure may improve export competitiveness over time.

2. Critics argue that contractionary measures may cause a recession if households reduce consumption more than expected.

Table 2 — Consumption-tax revenue

Consumption-tax revenue in Deltora

Targeted expenditure in Estavia

Read the extracts and answer the questions that follow.

Text A — Regional unemployment

1. Estavia's national unemployment rate is moderate, but the North Province has experienced a severe fall in tourism and high cyclical unemployment.

2. The government proposes targeted expenditure on local flood defences, roads and public buildings. The package includes current expenditure on public-sector wages and maintenance as well as infrastructure investment.

3. Supporters argue that fiscal policy can target a region more precisely than economy-wide measures.

Table 1 — North Province labour force

North Province labour force data and distributional assumption

Text B — Choosing projects

1. Several projects are ready to begin, limiting implementation delays. However, local politicians are pressing for a costly stadium that independent analysis predicts will have a low economic return.

2. Economists identify this as possible political pressure on fiscal decisions. They recommend prioritizing projects with strong employment and productivity effects.

Table 2 — Proposed expenditure

Proposed government expenditure in North Province.

Debt and fiscal consolidation in Feronia

Read the extracts and answer the questions that follow.

Text A — Rising debt

1. Feronia used repeated budget deficits to support demand during several weak years. Much of the borrowing financed public-sector wages and energy subsidies rather than infrastructure.

2. Government debt and annual interest payments have increased. The finance ministry is concerned about sustainable government debt and proposes gradual fiscal consolidation.

3. The economy is still below potential output, and youth unemployment remains high. Immediate spending cuts could weaken recovery.

Table 1 — Government debt

Government debt in Feronia

Text B — Consolidation plan

1. The plan would reduce energy subsidies and sell unused government land. Revenue from a sale of government assets is a one-off receipt rather than a recurring source of taxation.

2. The government promises to protect capital expenditure on water systems and ports, which may raise future productive capacity and revenue.

Table 2 — Budget, billion ferons

Feronia government budget and subsidy recipient

Tax reductions in Galenia

Read the extracts and answer the questions that follow.

Text A — Weak household confidence

1. Galenia is experiencing slow growth following a decline in export demand. The government has announced temporary personal income-tax reductions.

2. The tax cuts are intended to raise disposable income and consumption. However, household confidence is weak, and many households may save the additional income or repay debt.

3. The government will also bring forward repairs to schools and hospitals because direct purchases may support demand more reliably.

Table 1 — Representative household, galens

Representative household annual income and direct tax before the tax cut.

Text B — Budget implications

1. The package will increase the deficit. Supporters argue that temporary borrowing is justified during a downturn, while critics fear that temporary tax cuts will become politically difficult to reverse.

2. The government describes the package as discretionary fiscal policy because it requires a new policy decision and legislative approval.

Table 2 — Government revenue, billion galens

Government revenue before and after the tax reduction.

Public investment in Hesperia

Read the extracts and answer the questions that follow.

Text A — Water and transport programme

1. Hesperia has unreliable water supplies and congested roads. These constraints increase firms' costs and discourage private investment.

2. The government proposes capital expenditure on reservoirs and urban transport. Construction will raise aggregate demand in the short run, while improved infrastructure may increase productive capacity.

3. The economy has little spare capacity, so some economists expect additional expenditure to cause inflation before new infrastructure becomes productive.

Table 1 — Investment programme

Planned capital expenditure by project.

Text B — Financing choices

1. The government is considering higher corporation tax or borrowing. Businesses argue that higher tax may reduce after-tax profit and investment.

2. The finance ministry states that debt remains sustainable if the projects raise future GDP and tax revenue sufficiently.

Table 2 — Nominal GDP

Nominal GDP before and after the investment programme.

Fiscal restraint in Iridia

Read the extracts and answer the questions that follow.

Text A — Controlling inflation

1. Iridia has experienced rapid growth in consumption and house construction. Unemployment is low, but demand-pull inflation has risen.

2. The government plans to reduce transfer payments to high-income pensioners and increase personal income tax. It describes this as a fiscal-policy stance intended to reduce excessive aggregate demand.

3. Lower-income groups will continue receiving benefits, reflecting the government's objective of equitable income distribution.

Table 1 — Price-level data

Consumer price index data for Iridia.

Text B — Policy uncertainty

1. The central bank estimates that inflation is partly caused by food-supply disruptions. Businesses therefore question whether lower aggregate demand is appropriate.

2. The government acknowledges that the effectiveness of fiscal policy depends on the cause of inflation and the response of households.

Table 2 — Household tax data

Average annual household income and direct tax payments in Iridia.

Stabilizing Jorvik's economy

Read the extracts and answer the questions that follow.

Text A — Volatile commodity revenue

1. Jorvik exports copper, and fluctuations in copper prices cause large changes in tax revenue, private investment and economic growth.

2. The government proposes a stabilization fund. During booms, part of its government revenue would be saved; during downturns, the fund would finance temporary expenditure on maintenance and employment programmes.

3. The objective is to reduce business-cycle fluctuations and create a more stable environment for long-term private investment.

Table 1 — Government revenue, billion kroner

Government revenue in low- and high-copper-price years.

Text B — Rules and flexibility

1. A fiscal rule would limit expenditure during commodity booms. Critics argue that strict rules may prevent necessary spending on health care and infrastructure.

2. The government says fiscal action will remain countercyclical, restraining aggregate demand in booms and supporting it in recessions.

Table 2 — Real GDP growth

Real GDP growth in Jorvik during downturn and boom years.

Revenue reform in Kalmora

Read the extracts and answer the questions that follow.

Text A — Dependence on state enterprises

1. Kalmora receives substantial revenue from state-owned electricity and mining enterprises. Falling mineral prices have reduced their profits and transfers to the government.

2. The government proposes selling minority shares in several enterprises. A sale can provide immediate revenue, but unlike taxation revenue, it cannot be repeated indefinitely.

3. Some proceeds would finance public-sector wages, medicines and routine maintenance, while others would fund improvements to the electricity network.

Table 1 — Government receipts, billion kalms

Government receipts in Kalmora

Text B — Spending priorities

1. Opposition parties argue that asset sales should not finance recurring current expenditure because the receipts are one-off. They favour using the proceeds for productive assets or reducing debt.

2. The economy is in recession, so immediate cuts to public services may further reduce aggregate demand and employment.

Table 2 — Proposed use of asset-sale receipts

Proposed allocation of asset-sale receipts in Kalmora.

Demand-pull inflation in Belpa

Belpa has experienced rapid growth in consumption and investment. Its government believes that excess aggregate demand is the main cause of inflation. It is considering a reduction in current expenditure, although public-sector trade unions oppose cuts to government employment and wages.

Table 1: Macroeconomic and budget information for Belpa

Macroeconomic and budget information for Belpa

Table 2: Marginal propensities in Belpa

Marginal propensities in Belpa

Belpa also has a current account deficit. Consumer goods account for a large proportion of its imports.

Government borrowing and crowding out in Ceria

Ceria's government has introduced a deficit-financed construction programme during a period of moderate economic growth. The government sells bonds in Ceria's domestic financial market to finance the programme. Commercial banks have limited additional funds available for lending.

Table 1: Fiscal expansion and financial-market data

Fiscal expansion and financial-market data in Ceria.

Table 2: Marginal propensities in Ceria

Marginal propensities in Ceria

Business organizations argue that higher government borrowing has made loans for private investment more expensive. The government argues that improved infrastructure will increase firms' productivity in the future.

Public investment and debt in Doran

Doran's government is deciding whether to continue a large renewable-energy and electricity-grid programme. The projects are expected to reduce transport and energy bottlenecks, but construction costs have risen. Most of the programme would be financed through government borrowing.

Table 1: Government budget and debt data

Government budget and debt data for Doran.

Table 2: Marginal propensities in Doran

Marginal propensities in Doran.

Doran's government can currently borrow at a relatively low interest rate. However, tax revenue is unstable because it depends heavily on profits from mineral exports.

Fiscal policy and external balance in Faron

Faron has a persistent current account deficit and demand-pull inflation. The government is considering reducing its purchases of goods and services by 10 billion sols. It expects the fall in national income to reduce expenditure on imports.

Table 1: National income and government budget data

National income and government budget data for Faron.

Table 2: Marginal propensities in Faron

Marginal propensities in Faron

Business groups warn that contractionary fiscal policy may reduce investment and employment. The government is also considering an increase in indirect taxation as an alternative to the spending reduction.

Conflicting objectives in Lydora

Read the extracts and answer the questions that follow.

Text A — Growth, inflation and employment

1. Lydora's economy is recovering unevenly. Urban consumer spending is strong and inflation is rising, while unemployment remains high in former industrial regions.

2. The government is considering higher indirect taxes nationwide together with targeted capital expenditure in high-unemployment regions. Fiscal policy therefore faces conflicting macroeconomic objectives.

3. The finance ministry expects the taxes to restrain consumption while regional infrastructure increases employment and productive capacity.

Table 1 — Labour-market data

National labour-market data for Lydora.

Text B — Budget and distribution

1. Consumer groups warn that indirect taxes may be regressive. The government proposes additional transfers to low-income households to protect their living standards.

2. Critics argue that using taxes, transfers and investment simultaneously makes the fiscal stance difficult to measure and may enlarge the budget deficit.

Table 2 — Proposed annual measures, billion lyrs

Proposed annual fiscal measures in Lydora.