Mariah Medina January 20, 2009 January 12, 2009 IB Econ Standard: 3 Word Count: 705 Dubai Plans 11% Increase

In Spending

In order to stimulate their economy, Dubai is planning to boost spending 11% from 2008. Dubai is one of the seven self-governing emirates in the Middle East. Dubai¶s government officials are willing to risk a modest fiscal deficit, instead of a cutting back on spending. Spending by the government and related entities would increase to 135 billion U.A.E. dirhams ($36.75 billion), and government spending would cap at 37.7 billion dirhams. They expect the deficit to be around 4.2 billion dirhams. In order to distribute the wealth among society, Dubai is planning to borrow on international markets to fund the loss, if things go as planned. If not, they¶ll use their reserves of running surpluses. Dubai¶s willingness to spend during this downturn could help with their current dismal economic state. The global financial crisis is causing lower confidence with investors. The director-general of the city-state¶s finance department, Nasser alShaikh, states that ³We are confident that this budget plan will help consolidate our markets and keep our economy healthy while creating a thriving environment to grow inward investment, ensuring long-term success for the emirate.´ Aggregate demand is the total demand for goods and services in the economy. According to the fiscal policy, this increase in government expenditure leads to an increase in AD. As a result, the price of the goods or services goes up (AKA the price level). Additionally, this can

count as an investment. When there¶s an increase in investments, interest goes up and taxes go down. These firms, operating close to capacity, have the initial objective to build more production, thus stimulating their economy and consolidating their markets. With the current lack of investment in Dubai¶s businesses and industries, there is a mild recession hitting the country, causing a deficit. However, the deficit will only by 1.3% of Dubai¶s estimated GDP. As we see in Figure 1, reduced investment has caused the AD curve to shift to the left, reducing output (Y), somewhat increasing the price level, and causing a recessionary gap between Y and Y1. The short run aggregate supply (SRAS) curve shows a small change in price level but a large change in output. The recession causes a drop in price level, but also a decrease in output, which is the major problem. To accommodate to recent economic climate and lower investment, Dubai initiated plans to help their economy stay afloat. This is illustrated in the fiscal policy, where the government increases their investment, shifting the AD curve to the right (or an increase in AD). An increase in AD leads to an increase in price level, shifting the point on the aggregate supply to a new location, affecting output (Y). Aggregate supply is the total supply of goods in

services produced by an economy within a given period of time. The government and businesses of Dubai hope that by increasing government spending and investment, the aggregate demand would rise to the level that it once occupied. As we see in Figure 2, the increased spending would theoretically shift the AD curve to the right, effectively eliminating the recessionary gap. Dubai¶s hope is that their faltering real estate sector and failing stock market will return to it once was. Companies have been laying off workers, furthering the recession. Dubai¶s plan to increase spending has its pros and cons. It will definitely help to stimulate the economy through spending, and it will help businesses stay afloat, but it also causes Dubai to have a deficit. Considering today¶s economic situation, it is very dangerous to depend on international investment to help you finance anything. In the short run, it will temporarily cause a spike in output, but in the long run, it will not have much impact, as it is returning the economy back to where it once was. However, it is good that Dubai has money and capital from surpluses to help pay the deficit in case the plan falls through. If Dubai puts this plan into effect, it will definitely help with the recession present and will help with consumer and investor confidence, putting Dubai on the road to recovery.

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