Question

Due to the corona virus affecting the economy of Saudi Arabia, and especially the labor market, the government of KSA has announced that they will pay 60% of the salary of the workers in the private sector. The students are expected to answer the following questions:

1. Is this considered a fiscal policy or a monetary policy?
2. Explain the impact of this policy and illustrate it using graphs. The impact should be explained from the goods and service market because we assume that the policy will be used for private consumption spending. Students should explain how it can fight back the recession.

Answer 1

Ans. As government is incuring expenditure by paying 60% of the incoming, so, it is a fiscal expansion. This increase in government expenditure will increase aggregate expenditure in the economy by the amount of expenditure, G and shifts the AE curve upwards from AE to AE’. This induces consumption spending, so, total increase in output due to this fiscal expansion will be the government policy multiplier (m) times the increased expenditure and output increases from Y to Y’. Thus, increase in outputs helps fight back recession.

*Please don’t forget to hit the thumbs up button, if you find the answer helpful.