1) How did Keynes suggest how the government can influence GDP output, and in what

circumstances does Keynes' ideas apply? (25 points) (200-500 words)

Keynesian economics suggested that the government can intervene in markets to increase
aggregate demand and stimulate the production of goods and services and employment. To be
exact, Keynes argued that economic downturns, recessions, can be stimulated by creating budget
deficits to increase government expenditure and subsequently decrease unemployment rates. By
lessening the unemployment rate and increasing the employment rate, spending capacity,
consumption, and tax revenue are increased while the government expenditure on welfare
programs is decreased. The government expenditure could also indirectly promote economic
activity to firms and thus increase tax revenue. The budget deficits are then offset by the tax
revenue generated by the project.
This indirect effect on the other components of the GDP can be attributed to Keynes’s
multiplier effect. The multiplier effect suggests that ceteris paribus, fiscal policies can impact the
aggregate demand by some constant. For example, the construction of a new bridge cost 5 million
pesos. The aggregate demand curve not only moves to the right with respect to the 5 million peso
government purchase, but also in addition to a certain amount that can be attributed to the
multiplier effect. This additional demand stems from additional consumption and investment from
the workers and firms benefiting from the public project.
2) Give three examples of Fiscal policies applied by the past three presidents of the Philippines,
and evaluate how effective or ineffective they were from a long-term point of view (10 years
down the line). (45 points) (600-1000 words)

Estrada’s Administration: Agrarian Reform

Part of Estrada’s initiatives in his Medium Term Development Plan was to give emphasis
on agrarian reform which allowed the agriculture sector the opportunity to thrive under his short
administration. The Farmer’s Trust Fund of 1999 specifically “allowed the voluntary consolidation
of small farm operation into medium and large scale integrated enterprise that can access long-
term capital” (Department of Agrarian Reform, n.d.). Estrada also launched a program called
Magkabalikat Para sa Kaunlarang Agraryo (MAGKASAKA) which aided in procuring joint
ventures with private investors (Department of Agrarian Reform, n.d.). In 2000, rice production
grew by 38% while sugar production grew by 24% (Balisacan, n.d.). These programs are effective
in the long run because the agricultural sector as well as private citizens could greatly benefit from
additional investments that could aid in increasing the production of goods.

Arroyo’s Administration: Expanded Value Added Tax (E-VAT)

One of Arroyo’s fiscal policies would be the E-VAT law of 2005 where additional tax
schemes were implemented to the then existing VAT law. The E-VAT law involved a 10% VAT
on the energy and oil industry, a 3% increase to corporate income tax, and the lifting of VAT
exemptions to certain industries. Then Finance Secretary Cesar Purisima noted that 70 percent of
the revenue from this fiscal policy would be allocated to budget deficits while only 30 percent
would cater to budgetary support (Calica, 2005).
In 2008, Arroyo stated that this tax scheme was able to procure ₱80 billion to ₱100 billion
annually and was a tremendous help amidst the 2008 financial crisis (GMA News, 2008). Arroyo
also mentioned that pro-poor projects and public infrastructure such as irrigation and RO-RO
facilities were funded by the E-VAT (GMA News, 2008). Given that the E-VAT is a good revenue
procurement scheme which tremendously aided in the large budget deficits in Arroyo’s early years,
this fiscal policy is effective in the long run. In addition, E-VAT is still utilized up to this date. No
significant alterations such as removal of non-exemptions have been made into law.

Aquino’s Administration: Sin Tax

One of Aquino’s fiscal policies is the Sin Tax Reform Law of 2012 which focused on
increasing taxation for tobacco and alcoholic beverages (Department of Finance, n.d.). Yearly non-
constant tax rate increases for said goods were implemented but were constant starting 2017
(Rappler, 2012). For example, if the retail price for a cigarette stick in 2012 was more than ₱11.50,
then the tax per pack in 2013 is ₱25. Tax per pack then saw an increment of ₱2, ₱1, ₱1, and ₱1;
tax for a cigarette pack costing ₱11.50 or more per piece was at ₱30 by 2017 (Casauay, 2012). In
2012, expected sin tax revenue for 2013, 2014, and 2015 were ₱33.96 billion, ₱42.86 billion, and
₱50.63 billion respectively (Rappler, 2012). The tax revenue from this fiscal policy was planned
to fund the Universal Health Care program as well as provide support for tobacco farmers.
Sin Tax Law proved to be an effective scheme in increasing funding for the healthcare
industry as well as decreasing the percentage of people who smoke (Mendoza, 2020). In 2016, the
DOH’s budget reached ₱122.6 billion which was thrice its budget back in 2012. Part of the tax
revenue was also able to fund PhilHealth (Ylagan, 2019). New tax policies and measures for these
goods, which are basically extensions of the Sin Tax Law, have been implemented (Department
of Finance, 2020), and significant tax revenue are still expected to be collected yearly (Philippine
Daily Inquirer, 2020).
3) Discuss five economic effects of COVID19 - a mix of micro and macro implications (30
points) 150 words max per effect, for 750 words total max.

Due to the nature and gravity of COVID-19, contact with others must be lessened and
social distancing must be applied. A lot of countries have opted to shut down borders and have
enforced a quarantine for an indefinite time. Because of this, the production and markets for goods
and services have also been cut and forcibly stopped by governments. Only markets and the
production of essential goods are ongoing; however, this only represents a portion of the usual
economic activity. IMF chief Kristalina Georgieva stated that a recession is clearly occurring
globally (Crutsinger, 2020).
Accompanying a recession is the rate of unemployment. Some firms must lay off personnel
to lessen the total cost of keeping the company afloat. According to NEDA chief Ernesto Pernia,
the country’s unemployment rate could rise up to double digits from the 5.1% rate this year
(Aguilar, 2020). It is known that recessions often cause increased unemployment rates and in
return, increased unemployment rates worsen recessions. Since unemployment signifies decreased
income for the household, consumption of goods and services also decreases.
In addition to the restricted income of unemployed individuals, the shutdown status of most
industries and lockdown status within a community have also decreased the general consumption
of goods and services for most households. Current expenditure of households focus on
purchasing essential goods for survival. NEDA stated that a 5 to 10% decline on consumption
could occur until June where 0.2 to 0.5% of the GDP is lost (NEDA, 2020).
Since the production of goods and services were forcibly stopped and an immediate
increase in demand for certain goods has risen, supply shortages are expected as well as the
subsequent tendency of sellers to increase the prices of goods. Current necessities such as face
masks and alcohol were still subject to overpricing (Lopez, 2020; CNN Philippines, 2020);
however, government regulation quickly came in by implementing a price freeze on said goods
and agricultural or basic necessities (Ornedo, 2020). In line with the immobile state of production,
two components of the GDP, investments and net exports have also been affected. NEDA (2020)
reported a 55% decrease in the total exports of goods to China and 45% decrease of exports to
Hongkong such that 2% to 5% of the GDP is lost.
In this state of calamity, government purchases have increased, realigned, and supposedly
focused on providing necessities to key industries. President Duterte recently announced a 275
billion peso fund to help in this situation, but the breakdown of funds have yet to be released.
However, a transfer payment scheme was promised to low income households (Nakpil, 2020). It
should be noted that transfer payments are not part of government purchases in computing for the
GDP, but could still indirectly increase the GDP. The additional income for the household will
most likely be spent rather than saved, so consumption is increased.
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