Macroeconomics Calculate Fiscal

Question :

Fiscal term is related to the government where it indicates the difference between the income or the expenditure of the government. 

Answer :

1)

In case government has raised more income from taxes than the spending on investment and public program then it has surplus else it has deficit. It calls for the government to be fiscally prudent else it will have to bridge the deficit by borrowing which has interest cost. But, if government is very fiscally conservative then it is not spending enough on the investment to create infra which will slow down the growth. In case of Germany, fiscal surplus would mean that there is more income for government than the spending. This means that government is not spending more money in the economy. This means lower investment hence lower economic growth. The same can be seen from the graphs, whereas the fiscal surplus has increased the investment have come down hence lower growth (Brickley 2001). In order to ensure that Germany has higher rate of growth, it needs to spend more on the aging infra such as railways which will ensure faster and cheaper goods movement which will bring down the cost of goods hence will enhance the demand and the growth of the country. 

2)

If the government decides to spend additional money to infrastructure then this is going to increase the spending in the economy. This means higher money flow and job generation in the economy.

Given the GDP is sum of investment + consumption plus + Government spending + export less import

Thus, as the government spending increases the investment increases and over all GDP growth increases. Further, as government spends money on infra it increases the speed and connectivity which allows more economic activity. It has been seen that if there are good roads then people can live down town and can commute to work. This is cheaper for them hence increases their disposable income thus they can spend more hence increases the economic growth of the country. 

3)

On account of minimum wage policy as introduced in Germany in 2015 there are two macroeconomic impact:

Higher inflation: Given there is certain sum that has to be paid to employees irrespective of the work, this increases the income of the employees. With the increase in income, they have more money to spend hence more money chases few goods hence in the short run inflation spikes up as has been seen in the case of German economy where the inflation had risen. As the income increases, the people have more money to buy goods and increase discretionary spending. This then calls for the suppliers to enhance the investment to meet this increased demand. Till, the same happens, people will have to face higher inflation. 

Higher economic growth: As the demand increases, firms have more incentive to invest so that they can cater to demand hence the economic growth goes up. German economy has been growing since 2015 when this policy was implemented (Brigham, 2010). As stated earlier, with the increase in inflation, the suppliers tend to invest in new factory and production capacity. This increases the employment and increases the economic growth of the country. 

4)

Given, Germany has high balance of payment as it is an export oriented economy and relatively stable or flat investment rate as projected. The balance payment is expected to remain in surplus. Unless, there is steep increase in the rate of investment in the German economy, it is expected to remain in surplus in near future. Due to impact of COVID German government has come up with the stimulus plan which will reduce the fiscal surplus however these measures are temporary and once the impact of COVID subside, the government is again expected to ride on the fiscal surplus plan. 

5)

Yes, German economy has been benefitted from the supply side economic reform. It has proactively made labour laws more flexible thus making hiring and firing relatively easier, lower wage rate. Thus, this has reduced the cost of product for German economy and has made them more competitive thus they have been able to export more. This has generated higher rate of employment hence German economy has been growing with relatively lower unemployment rate (Brock 2009). 

6)

Despite relatively lower growth rate recently, the demand policy of Germany has remained conservative. The government of Germany has not focused upon giving stimulus from its large balance of payment surplus to boost the growth rate. The result of the same has been that there is no major investment and demand boost from the government which could have aided the economic growth of the country. The government of Germany has prioritized the low inflation over higher economic growth as the increased spending from the government may trigger inflationary impact and government is trying to avoid that. That said, Germany has aging infra and is in dire need of investment. Eventually, to remain competitive, it will have to spend on the same.  

The government around the world have been leading the spending in the economy to keep GDP growth rate high. This is called demand side intervention from the government. However, the same has not happened in Germany where government doesn’t lose its purse and keeps fiscal surplus. Of the billions of dollar in surplus, it could have used a part of it to invest in aging infra which could have boosted the economic growth in the economy. 

It is to be noted here that the fiscal conservative polices have been met with the monetary expansionary policies in Germany. Thus, the money cut from the government have been met with the lower interest and easy access to capital by the central government of the Germany. German economy has almost 0% rate of interst. 

References

Brickley, J. (2001). Managerial economics and organizational architecture. New York, NY: McGraw-Hill Irwin.

Brigham, E. F (2010). Financial management: Theory and practice (13th ed.). Mason, OH: South-Western Cengage Learning.

Brock, J. (2009). The structure of American industry (12th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.