Question

4.2 Question 4.2.1 to 4.2.3 is based on the excerpt below:

SA Household Finances are in Dire Straits The South African Reserve Bank (Sarb) yesterday painted a bleak picture of household finances, saying household expenditure had tanked for the first time in three years. In its quarterly bulletin for June, published yesterday, the central bank said consumption expenditure by households had fallen by 0.8% in the first quarter of 2019 following a 3.2% increase in the fourth quarter of 2018 as the economy wanes. The economy is on a downward spiral with gross domestic product contracting by 3.2% in the first quarter of 2019 – the largest contraction since the first quarter of 2009 when it contracted by 6.1%, at the height of the global financial crisis. The Sarb said the deterioration in the household consumption was in line with the decline in consumer confidence in the first quarter of 2019, as measured by the First National Bank/Bureau for Economic Research Consumer Confidence Index.The Sarb said consumers’ finances had been under pressure due to the prolonged period of weak economic activity, rising unemployment, an increased tax burden and successive fuel price increases. Growth in the real disposable income of households was weighed down by lacklustre employment growth and slower wage growth.

4.2.1 The article states that “the economy is on a downward spiral……first quarter of 2019.” Explain which phase of the business cycle this represents. (5)

4.2.2 The article further states that “growth in the real disposable income……and slower wage growth.” In terms of this statement, discuss the type of fiscal policy that government can implement to remedy this situation, paying specific attention in your answer to the tool that needs to be targeted. (5)

4.2.3 Discuss a demand side policy that can be implemented by government to reduce unemployment mentioned in the article.

Answer 1

The given excerpt shows the effect of Dire strait in South Africa.

1) Here, this article states that “The economy is on a downward spiral with gross domestic product contracting by 3.2% in the first quarter of 2019”. This statement explains the contraction phase of the business cycle under which an economy moves towards the recession due to a decrease in the household’s consumption expenditure.

2) This article also states that “Growth in the real disposable income of households was weighed down by lacklustre employment growth and slower wage growth.” According to the given statement, there is a lesser increase in the real disposable income than a reduction in the employment rate as well as the wage rate. A government can use expansionary fiscal policy to remedy this solution such that reduction in the taxes on the income of the people. When the government reduces the tax rate, it will increase the people's real disposable income. Therefore, the reduction in taxes can be work effectively in this situation.

3) Demand-side policy refers to the policy that affects the aggregate demand by the people in the market. To reduce unemployment mentioned in the article, the government can use expansionary policy, such as increasing government spending. The government spends money to improve the infrastructure of society. For the construction work, the government needs labor or worker, which will lead to an increase in the employment rate in the South African economy. As a result, the unemployment rate will be decreased.