Question

Q4 .

On 26 February, Hong Kong’s Financial Secretary Paul Chan announced that all permanent residents in Hong Kong will receive a HK$10,000 from the HKSAR government. This policy will cost the HKSAR government roughly HK$71 billion and it is aimed at tackling the worse economic downturn that the city has experienced in the last 10 years.

a. Briefly explain why this policy can increase equilibrium output in the short run .  

b. An economist argues that if the HKSAR government spends HK$71 billion on goods and services instead of giving each Hong Kong resident a HK$10,000, the policy effect on output would be larger. Briefly discuss the economic rationale behind this economist’s argument.                                                       

Answer 1

a) If we analyze the current financial situation across any country, we might observe that the consumer spending has plummeted. Reasons for this could be layoffs which further contributes to depletion in the household savings. So, in this particular scenario, wherein permanent residents will receive HK$10000, we can expect that the spending will increase in manifolds thereby posing an increase in demand in goods, which is to be countered by a sufficient increase in supply thereby ultimately lifting up the market equilibrium. This is what the Hong Kong Government thought. But there is a slight possibility of inflation, although not threatening. Therefore, this policy can potentially restore households' spending in this fiasco.

b) Clearly the economist's rationale here is to ensure that the citizens of Hong Kong are provided with the necessary essential supplies needed. Yeah, it's true that a lot of businesses have suffered during this unprecedented situation, especially those requiring a good amount of supply chain management. So it's very tough to meet the demands of the consumers and often the firms get overwhelmed and unable to deliver the essentials needed as well. When the government intervenes and invests on these goods and services, there are some incentives for the people:

• The people need not worry about panic buying, especially the low income ones
• The consumer rights are preserved against inflated prices set by private firms taking advantage of this situation.
• Logistically feasible even to aid those temporary Hong Kong residents or immigrants from other countries unlike the case of paying HK$10000 to the permanent citizens alone.

All this translates to the output being larger, thus bringing back a demand-supply equilibrium in place.

Hope this helps. Do hit the thumbs up. Cheers!