Question

QUESTION 1

“A bread price subsidy to benefit the poor is economically inefficient”. (a) Analyse this statement using a diagram. (Assume constant production costs.) (b) Analyse with diagrams which other grants or transfers the South African government can use to relieve the plight of the unemployed, especially during the current coronavirus, COVID-19, situation? (c) With the aid of a diagram, show the effect of an income transfer on work effort also.

Answer 1

The price ceiling will help the poor people to maintain their consumption. On the other hand, this will affect the supply side.

The price ceiled at the level was the horizontal line. This will increase the demand for bread by the poor people through reducing the price. But the supply fall down, negatively affect the producers.

b) The use of fiscal policy will reduce the unemployment rate and also expand the government spending. This expansionary fiscal policy will shift the aggregate demand curve to right. The expansionary fiscal policy by increasing the government spending and reduction in tax policy. The aggregate supply curve also shift out through increasing level of government spending and the new tax policies.

The real output and price level changed in according to the expansionary and contractionary fiscal policy. The real out determine through the interaction of aggregate demand and aggregate supply. Expansionary fiscal policy will improve the South African economic condition.
In this pandemic situation there is lack of financial support from the government. So there is extractionary fiscal policy will take. At the same time, other foreign relations will boost the current economic conditions.