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The government expenditure would have an effect on the economy since it is part of the

computation for the GDP. Government expenditure may improve the situation of the country

since it increases economic growth and decreases unemployment, if government spending would

not be mismanaged.

6. a.) A budget deficit occurs when government spending exceeds income derived from tax. This

may be remedied by increasing efficiency in tax collection and avoiding government

mismanagement. Tax rates need not always be increased in order to increase revenue as most of

the time, especially for the Philippines, the problem lies in the collection process. Tax evasion

has been frequently occurring, and this may be avoided by computerization of the process, or

increasing the penalty of those who fail to pay or incorrectly pay the amount of tax. The Bureau

of Internal Revenue must also consider increasing the percentage of income tax returns they

audit to improve collection.

b.) High unemployment rate can be offset by increasing government spending. The

government allocates a part of its revenues to education. Education is a vital instrument in

producing competent and skilled workers. These are the type of workers the firms would need

and would pay for. In other words, funding education by providing more scholarships,

sponsoring books and other school materials, and hiring more teachers are all essential to avoid a

high unemployment rate in the long run. Low interest rates may also help as businesses incur

less borrowing costs, thus, allocating more capital for hiring workers. Lowering the minimum

wage, or wages in general, may also attract investors to consider maximizing a labor extensive

form of production, which requires more workers.

c.) Investment may flourish by lowering interest rates as discussed in detail in the third

question. Fiscal incentives such as duty free importation and tax holidays may be offered for

investors to note that capital is cheap in the country, which would hopefully increase their

investment. Lower wages may also be beneficial in a way that utilizing the labor force will be

more attractive for investors as a form of investment.

d.) Preventing excessive volatility is a function of the government. Thus, when high demand for

dollars, such as depreciation, is present, the government is quick to remedy this by supplying the

necessary amount of dollars held as reserve for this kind of situation. Lessening tariffs or

import duties may also prove useful as this increases imports, to be combated with the rise in

exports due to depreciation.

e.) Growth is measured by observing the Gross Domestic Product (GDP) or Gross National

Income (GNP). Applying the final expenditure approach, sustainable or high growth may be

achieved by increasing investment, or government spending, or decreasing imports.

Investment may be increased by lowering interest rates, offering fiscal incentives, and lowering
wages. Government spending may be increased by increasing the national budget, alongside the

efficiency of revenue collection. Lastly, imports may be decreased through appreciation, or the

strengthening of the local currency versus foreign currency.

f.) Lowering interest rates often result to high demand, compared to current supply, and this is

believed by some economists to be the cause of inflation. Bangko Sentral ng Pilipinas may

choose to print excessive amounts of money as an alternative since this is inflationary as it

reduces the value of money.