Wajeeha Nadeem Pep Assignment 2 5th July,2023

A.     Why do we refer to fiscal policy as "Resource Mobilization Policy"?

Fiscal policy is often referred to as "Resource Mobilization Policy" because it focuses on the government's
role in mobilizing and managing financial resources within an economy. It involves the use of government
spending, taxation, and borrowing to influence the overall level of economic activity, promote stability, and
achieve specific economic objectives.

Here are the reasons why fiscal policy is considered a resource mobilization policy:

Revenue Generation: Fiscal policy involves the collection of government revenue through various
sources, primarily taxation. By imposing taxes on individuals, businesses, and goods, the government
mobilizes financial resources that can be used to fund public expenditure, infrastructure development,
social programs, and other essential services. Through revenue generation, fiscal policy plays a crucial
role in mobilizing resources to finance government activities.

Redistribution of Resources: Fiscal policy also aims to ensure a fair distribution of resources within a
society. By implementing progressive taxation systems, the government can collect a larger proportion of
income from high-income individuals and redistribute it to provide benefits and support to lower-income
segments of the population. This redistribution of resources helps reduce income inequality and promote
social welfare.

Allocation of Resources: Fiscal policy plays a significant role in allocating resources to different sectors of
the economy. Through government spending, the fiscal policy can prioritize investment in infrastructure,
education, healthcare, defense, and other key areas. By allocating resources strategically, fiscal policy
can stimulate economic growth, address market failures, and promote long-term development.

Stabilization of the Economy: Another aspect of fiscal policy as a resource mobilization policy is its role in
economic stabilization. During economic downturns or recessions, fiscal policy can be used to mobilize
resources to stimulate aggregate demand and boost economic activity. This can be achieved through
measures like increased government spending or tax cuts to encourage consumption and investment,
thus mobilizing resources towards productive sectors of the economy.

Debt Management: Fiscal policy includes the management of government borrowing and debt.
Governments often resort to borrowing to finance budget deficits or fund long-term projects. Effective
fiscal policy ensures the prudent management of public debt to prevent unsustainable levels of borrowing,
reduce reliance on external funding, and maintain fiscal discipline. This aspect of fiscal policy helps
ensure efficient mobilization and utilization of financial resources.
In summary, fiscal policy is referred to as "Resource Mobilization Policy" because it encompasses various
measures to mobilize, allocate, and manage financial resources within an economy. It involves revenue
generation, redistribution, resource allocation, economic stabilization, and debt management. By
strategically utilizing fiscal tools, governments aim to mobilize resources to achieve economic and social
objectives, promote sustainable development, and address societal needs.

B.   what do we mean by "Economic Policy Coordination"? Explain by example.

"Economic policy coordination" refers to the cooperative efforts undertaken by multiple countries or
economic entities to align their economic policies and actions to achieve mutually beneficial outcomes. It
involves harmonizing policies, sharing information, and coordinating actions to address common
challenges, promote stability, and enhance overall economic performance.
Wajeeha Nadeem Pep Assignment 2 5th July,2023

An example of economic policy coordination is seen in the European Union (EU) through its coordination
of fiscal and monetary policies among member states. The EU's Economic and Monetary Union (EMU) is
a prime example of economic policy coordination.

Fiscal Policy Coordination:

The EU member states that adopted the euro as their currency participate in the coordination of fiscal
policies through the Stability and Growth Pact (SGP). The SGP sets fiscal rules and guidelines to ensure
sound fiscal management, avoid excessive deficits, and promote fiscal discipline. Member states are
required to submit their national budgets and fiscal plans to the European Commission for assessment
and coordination.

For example, if a member state's budget plan indicates a high deficit or deviation from the agreed-upon
fiscal targets, the European Commission can provide recommendations for corrective measures. This
coordination aims to prevent fiscal imbalances, promote responsible fiscal policies, and maintain stability
within the eurozone.

Monetary Policy Coordination:

The European Central Bank (ECB) is responsible for formulating and implementing monetary policy for
the eurozone. The ECB's monetary policy decisions, including interest rates and liquidity provision, are
coordinated to achieve price stability and support economic growth across the member states.

Through regular meetings and consultations, the ECB coordinates its monetary policy stance with the
national central banks of the eurozone. The coordination ensures a consistent approach to monetary
policy, taking into account the diverse economic conditions and challenges faced by different member
states. This coordination helps maintain monetary stability and fosters economic convergence within the
eurozone.

Overall, the economic policy coordination in the EU aims to harmonize fiscal and monetary policies, foster
economic integration, and enhance economic stability and growth. It recognizes that the interdependence
of economies necessitates cooperation and coordination to address common challenges and achieve
collective objectives.
In addition to the EU example, other forms of economic policy coordination can be observed among
international organizations like the G20, where member countries collaborate to address global economic
challenges, promote trade, and coordinate policies to foster global economic stability and development.

C.   How may we use" Elasticity of Tax" to assess if there has been an increase/
decrease in the size of the black economy?

The concept of "elasticity of tax" can be utilized to assess the potential impact of changes in the size of
the black economy on tax revenue. Elasticity of tax refers to the responsiveness of tax revenue to
changes in the tax base or tax rates. By analyzing changes in tax revenue in relation to changes in
economic activity, it is possible to infer the presence of an increase or decrease in the size of the black
economy. Here's how this assessment can be conducted:

Tax Revenue Analysis: The first step is to analyze tax revenue trends over a specific period. This involves
examining the actual tax revenue collected by the government, particularly from sectors or activities that
Wajeeha Nadeem Pep Assignment 2 5th July,2023

are susceptible to black market transactions. It is essential to consider the tax revenue in relation to the
overall economic activity and changes in tax rates during the period under review.

Elasticity Calculation: Once the tax revenue data is gathered, the elasticity of tax can be calculated. The
elasticity of tax can be measured using the formula: Elasticity = (% change in tax revenue) / (% change in
tax base or tax rate). In this case, the tax base refers to the taxable economic activity associated with the
black economy. By comparing the change in tax revenue with the corresponding change in the tax base,
it is possible to estimate the elasticity of tax.

Interpretation: The elasticity of tax provides insights into the responsiveness of tax revenue to changes in
economic activity associated with the black economy. If the estimated elasticity of tax is high (greater than
1), it suggests that tax revenue is sensitive to changes in the tax base. A significant decrease in tax
revenue compared to the decrease in the tax base indicates that a larger portion of economic activity is
moving into the black economy, resulting in reduced tax compliance.

On the other hand, if the elasticity of tax is low (less than 1), it implies that tax revenue is relatively less
responsive to changes in the tax base. This could indicate a smaller impact of the black economy on tax
revenue, suggesting a smaller size of the black economy or a more effective tax collection system.

Consideration of Other Factors: It is important to note that changes in tax revenue and elasticity of tax
may also be influenced by factors other than the black economy, such as changes in tax policy, business
cycles, legal reforms, or shifts in economic structure. Therefore, a comprehensive analysis should take
into account these factors and attempt to isolate the impact of the black economy on tax revenue.

In summary, the elasticity of tax can provide insights into the potential changes in the size of the black
economy by examining the responsiveness of tax revenue to changes in the tax base. However, it is
crucial to consider other factors and conduct a thorough analysis to draw accurate conclusions about the
presence and magnitude of changes in the black economy.