Answer to Question #290405 in Macroeconomics for vena

Question

(a) The existing debt would reduce the flexibility of budget arrangement, derive the evolution of the debt to GDP ratio (debt ratio) and explain the change in the debt ratio over time. (8 marks)

(b) Based on the answer in question (a), what is the determinant factors of change in the debt ratio and explain its implication briefly. (8 marks)

(c) Budget 2020 indicate a little bit changes on tax structure of Malaysia through the increasing tax rate of high income group from 28 percent to 30 percent; and reducing tax rate on small medium enterprise. Based on the economic growth equation, discuss the impact of debt restructuring to the target of being a developed nation by the year 2020. (9 marks)

Answer 1

a) The existing debt will reduce the flexibility of the budget system, as part of the budget funds will go to pay the debt. Debt-to-GDP ratio: the indicator may change over time both up and down, so debt and GDP may change

b) The determining factor is the state of the economy and the budget system, respectively. If there is a depression or stagnation, then, accordingly, the debt will grow and vice versa, at the stage of growth and recovery of the economy, the debt will decrease

c) The Malaysian government has appropriately redistributed private sector revenues to the country's budget, taking the surplus from the rich and reducing taxes from small entrepreneurs. Consequently, by raising the budget through the rich stratum and supporting small companies, the Malaysian government will support aggregate demand and economic growth in the future