Question

Question 2

To support private sector employees, the government of Bahrain has decided to pay their salaries for three months starting April 1, 2020. Total expenditures by the government is expected to exceed BD550 million to “mitigate the social and economic impacts of the coronavirus pandemic, and to maintain the growth of the private sector and enhance its vital role in supporting the wheel of the national economy”.

a. What is the real cost of government expenditures? Think about your estimate of the taxes you pay and what you could have purchased with that money.

b. How do you explain the overall impact of government paying the salaries of private sector employees on the economy?

c. To pay for private employees, suppose the government will borrow the money from the financial markets. What will be the impact of government borrowing on the economy both in the short and long run?

Answer 1

a). If today govt of bahrain decide to pay salaries to private sector employees, then we all think that govt is doing for this welfare of economy in short run. If we look out in long run if govt give salaries to private sector employee, then in future govt take back that money by inducing high tax rate and we have to pay high tax rate in future as a people of Bahrain. From thst money( that goes in a tax form) one could earn a better livelihood, increase consumption or increase saving or invest in future.

b) Impact on Economy by paying salaries to private sector- It is no doubt that in short run this process can work.By paying salaries to private sector employees can create a demand in other sector economy, so when demand increase supply would also increase, hence this lead to decrease in unemployment in economy during a period of crisis covid19. By providing salaries to private sector employees leads to increase in money supply, if money supply increase causes interest rate to fall down hence it causes increases in investment today. Todays increase in investment give money in future.

on the other side, when govt paying salaries to private sector, in long run govt will increase the tax rate to earn highest tax revenue and mitigate its expenditure.

c) In short run if govt borrow money from financial market, the crucial role plays here by interest rate. and this burden of interest rate will fall on consumer or people. In short run suppose govt pay the salaries to private sector employees but in future govt has to repay this money along with higher interest rate and to pay this borrowed money govt will increase tax rate in future. hence by expanding tax rate in future govt pay its debt.