Question

Based on the above economic scenario, describe the fiscal economic policy required to
overcome these challenges.

Section A Important: - Each answer should have minimum 100 words, if data or table used to support your answer, must give proper reference Only upload answer with question number in MS word, please don't copy any question, case. instruction or any other information Read the economic case scenario and answer the questions based on it: Oman has far fewer resources to draw on than most of its neighbors. Its foreign exchange reserves and sovereign wealth fund assets are together worth around 50% of GDP, far less than most Gulf neighbors have, according to London-based Capital Economics. The country has oil and gas reserves, but they don't provide enough income to cover the government's large expenditure bill. In essence, Oman has been living beyond its means for many years, running persistently large budget and current account deficits. To finance these, the government keeps on issuing debt. The debt-to-GDP ratio has risen from 5% in 2014 to 60% of GDP now. To help match its income and spending, Muscat has also looked to its richer neighbors for support, but while it has been able to secure some assistance, it has not been given as much as Bahrain. Like most Gulf countries, Oman keeps its currency pegged to the U.S. dollar in an effort to provide more economic stability. This makes sense given the chief export, oil, is priced in dollars, but maintaining the exchange rate is not always easy due to the weakness of the economy In the absence of substantial fiscal measures to curtail the government deficit, fiscal and external buffers will continue to erode," the agency wamed in a statement issued on January 12. "We anticipate that government may face a difficult trade-off in the coming months between addressing social concerns, partly arising from weak growth and high youth unemployment, and rising fiscal, external, and funding pressures. The Omani authorities have proved wary of putting the population under too much pressure. Intermittent protests over the past decade have generally been met with promises of more spending and job creation. New taxes have been repeatedly delayed. A value-added tax (VAT) is now due to be introduced in 2021, years later than initially planned, but could easily be postponed once again. The World Bank has previously warned that "A key risk facing Oman is that the pace of fiscal and structural reforms may slow, hurting investor confidence and prospects for debt sustainability." In current scenario the economy is facing various challenges including declining demand in consumer market, downfall in industrial growth, declining export, crushing crude oil prices and fiscal losses. If the current scenario will not be under control under measured time frame then it may cause various economic growth and development related issues, employment related issues and leads to declining fiscal reserves. 1. Based on the above economic scenario, describe the fiscal economic policy required to overcome these challenges. [definition 2+ relating to case 3= 5 Marks]

Answer 1

For this type of challenges government should follows the expansionary fiscal policy.Expansionary fiscal policy increases the level of aggregate demand, through either increase in government spending or reductions in taxes. The policy can do this by (1) increasing consumption by raising disposable income through cuts in personal income taxes or payroll taxes; (2) increasing investments by raising after-tax profits through cuts in business taxes; and (3) increasing government purchases through increased spending by the federal government on final goods and services and raising federal grants to state and local governments to increase their expenditures on final goods and services.

Figure 1 illustrates the process by using an aggregate demand/aggregate supply diagram in a growing economy. The original equilibrium occurs at E0, the intersection of aggregate demand curve AD0 and aggregate supply curve SRAS0, at an output level of Q0 price level P0.

One year later, aggregate supply has shifted to the right to SRAS1 in the process of long-term economic growth, and aggregate demand has also shifted to the right to AD1, keeping the economy operating at the new level of potential GDP. The new equilibrium (E1) is an output level of Q1and a price level of P1. One more year later, aggregate supply has again shifted to the right, now to SRAS2, and aggregate demand shifts right as well to AD2. Now the equilibrium is E2, with an output level of Q2 and a price level of P2. In short, the figure shows an economy that is growing steadily year to year, producing at its potential GDP each year, with a small inflationary increase in the price level.

LRASO LRAS, LRAS, so AS level ADO o feel output fiscal policy Expansionary