YONGON UNIVERSITY OF ECONOMICS

Master of Business Administration Programme

EMBA 19th Batch (Online), Final Examination, December 2022

EMBA – 113 Macroeconomic Environment

1. A change in one policy may influence the other, and this interdependence may alter
the impact of a policy change. How could you consider this situation? Your proficiency is
very important for policymakers. Show your work, based on your learning.

The two arms of macroeconomic policy are monetary and fiscal policy. Fiscal policy
encompasses the government’s decisions about spending and taxation. It is changes in the
taxing and spending of the government for the purpose of expanding and contracting the level
of aggregate demand. Monetary policy refers to decisions about the nation’s system of coin,
currency, and banking. Fiscal policy is usually made by elected representatives, such as the
U.S. Congress, British Parliament, or Japanese Diet. Monetary policy is made by central
banks, which are typically set up by elected representatives but allowed to operate
independently. It is changes in the interest rates and money supply to expand and contract
aggregate demand under the control of the central bank. Fiscal policy and monetary policy in
any country are two macroeconomics stabilization tools. A change in one will influence the
effectiveness of the other and there by the overall impact of any policy changes in the country
depending on the state of the economy and its development. Fiscal policy and monetary
policy go hand in hand with each other. Both are interdependent on each other.

The model of the open economy shows that the flow of goods and services measured
by the trade balance is inextricably connected to the international flow of funds for capital
accumulation. The net capital outflow is the difference between domestic saving and
domestic investment. Thus, the impact of economic policies on the trade balance can always
be found by examining their impact on domestic saving and domestic investment. Policies
that increase investment or decrease saving tend to cause a trade deficit, and policies that
decrease investment or increase saving tend to cause a trade surplus.

An analysis of the open economy has been positive, not normative. It has shown how
various policies influence the international flows of capital and goods but not whether these

1
policies and outcomes are desirable. Evaluating economic policies and their impact on the
open economy is a frequent topic of debate When a country runs a trade deficit, policymakers
must confront the question of whether it represents a national problem. Most economists view
a trade deficit not as a problem in itself, but perhaps as a symptom of a problem. A trade
deficit could reflect low saving. In a closed economy, low saving leads to low investment and
a smaller future capital stock. In an open economy, low saving leads to a trade deficit and a
growing foreign debt, which eventually must be repaid. In both cases, high current
consumption leads to lower future consumption, implying that future generations will bear
the burden of low national saving. Yet trade deficits are not always a symptom of an
economic malady. When poor rural economies develop into modern industrial economies,
they sometimes finance increased investment with foreign borrowing. In these cases, trade
deficits are a sign of economic development. For example, South Korea ran large trade
deficits throughout the 1970s and early 1980s, and it became one of the success stories of
economic growth. The lesson is that one cannot judge economic performance from the trade
balance alone. Instead, one must look at the underlying causes of the international flows.

For the US example of trade deficit, the start of the trade deficit coincided with a fall
in national saving. This development can be explained by the expansionary fiscal policy in
the 1980s. With the President’s support, the U.S. Congress passed legislation in 1981 that
substantially cut personal income taxes over the next three years. Because these tax cuts were
not met with equal cuts in government spending, the federal budget went into deficit. These
budget deficits were among the long and largest ever experienced in a period of peace and
prosperity. Such a policy should reduce national saving, thereby causing a trade deficit.
Because the government budget and trade balance went into deficit at roughly the same time,
these shortfalls were called the twin deficits. When the U.S. federal government got its fiscal
house in order in the early 1990s, the Presidents signed for tax increases, while Congress kept
a lid on spending. In addition to these policy changes, rapid productivity growth in the late
1990s raised incomes and, thus, further increased tax revenue. These developments moved
the U.S. federal budget from deficit to surplus, which in turn caused national saving to rise.
The increase in national saving did not coincide with a shrinking trade deficit, because
domestic investment rose at the same time. The likely explanation is that the boom in
information technology in the 1990s caused an expansionary shift in the U.S. investment
function. Even though fiscal policy was pushing the trade deficit toward surplus, the
investment boom was an even stronger force pushing the trade balance toward deficit. In the
2
early 2000s, fiscal policy once again put downward pressure on national saving. Tax cuts
were signed into law by the President in 2001 and 2003, while the war on terror led to
substantial increases in government spending. The federal government was again running
budget deficits. National saving fell to historic lows, and the trade deficit reached historic
highs. A few years later, the trade deficit started to shrink somewhat, as the economy
experienced a substantial decline in house prices which led to the Great Recession. Lower
house prices led to a substantial decline in residential investment. The trade deficit fell from
5.5 percent of GDP at its peak in 2006 to 3.0 percent in 2013. As the economy gradually
recovered from the economic downturn, saving and investment both increased, with little
change in the trade balance from 2013 to 2016.

Additionally, there are many ways fiscal policy affect monetary policy and thus
central banks. Firstly, an expansionary fiscal policy would result in increased budgetary
deficits for which the government can choose expansionary monetary policy by resort to the
printing press. This would lead to inflation. The government can even resort to the funding of
debt through market sources. There is a possibility of crowding out and if the domestic debt
dependent on foreign funding result in balance of payment or exchange rate problems and
worrying to central bank. This would further lead to banking crisis. The government can even
resort to another direct channel say increasing indirect taxes value added tax. This would
raise the prices leading to wage-spiral and higher inflation. The higher taxation would be
compensated by more savings and less consumption. Fiscal policy is more suitable to fight
unemployment as monetary policy following expansionary policies would take longer to sort
unemployment a sit depends on the private sector invest in new projects. However,
government following expansionary fiscal policy by increasing expenditure on projects
would open new vacancies and reducing unemployment faster. On the other hand, the
monetary policy would be more effective to fight inflation than fiscal policy. The
contractionary monetary policy would reduce money supply quickly and contractionary fiscal
policy would take unattractive decisions like raising taxes or reducing expenditure. Both
monetary and fiscal policies face time lags.

When the policies are initiated, it makes the economy works through numerous
rounds of production, income and consumption to realize the results. The recognition and
impact lag for each is the same. That is why scholars assumed that changing in one policy
may influence the other, and this interdependence may alter the impact of a policy change.
3
2.     Suppose the oil production over the world is significantly reduced due to some motives. If
you are a responsible person of your economy, how could you respond this problem?

Global oil supply is set to tighten, intensifying concerns over soaring inflation after
the OPEC+ group of nations announced its largest supply cut since 2020.The move comes
ahead of European Union embargoes on Russian energy over the Ukraine war.The Organiza-
tion of the Petroleum Exporting Countries (OPEC) and their allies, including Russia, agreed
to slash output by two million barrels per day (bpd) just ahead of the peak winter season.

The OPEC+ member states cut production starting after gathering for their first face-
to-face meeting at their Vienna headquarters since the start of the COVID-19 pandemic.The
group said the decision was based on the “uncertainty that surrounds the global economy and
oil market outlooks”. In order to stable energy markets, OPEC decided the real supply cut
would be about 1 million to 1.1 million bpd, a response to rising global interest rates and a
weakening world economy.

After the announcement, the price of Brent crude, international benchmark, rose 1.7
percent, reaching $93.29 a barrel. At the start of this year, Brent prices were close to $79 a
barrel. It soared above $127 in March, two weeks after the Russian invasion of Ukraine – the
highest in 14 years. Higher oil prices and a strong US dollar could represent a difficult situa-
tion as most countries buy their oil using dollars. The move could increase inflation and the
cost of living.“The higher the energy prices, the sharper the central banks must kill demand to
pull the prices lower,”

The move could also put regions like Europe in a difficult position. Many European
nations have imposed a price cap on Russian oil, but Putin has said Russia will withhold ex-
ports to countries that enforce the cap.According to an analysis by the Financial Times,
OPEC’s cuts could coincide with further falls in supply. Also, the move could hinder efforts
to deprive Moscow of oil revenue following Russia’s invasion of Ukraine. Professor Adam
Pankratz, professor at the University of British Columbia’s School of Business, argued to Al
Jazeera the price of oil will probably go up with the cut and oil is “going to be a scarce com-
modity”.

In Myanmar, fuel prices continued to spike in recent days and it is stable on the high
side, according to the fuel price market. Fuel prices started to spiral on 8 August 2022. Be-
tween 13 and 15 August, the prices remained unchanged on the high side. The prevailing fuel
prices stood at K2,320 per litre for Octane 92, K2,390 for Octane 95, K2,730 for premium
4
diesel and K2,655 for diesel. The upward spiral of the fuel prices is attributed to the continu-
ous depreciation of the Kyat against the US dollar. Despite the Central Bank of Myanmar’s
reference exchange rate of K2,100, a dollar is valued at K2,900 in the grey market.

As the Supervisory Committee on Oil Import, Storage and Distribution of Fuel Oil
stated that surging fuel price is following an increase in the price index set by Mean of Platts
Singapore (MOPS), the pricing basis for many refined products in southeast Asia.The com-
mittee is governing the fuel oil storage and distribution sector effectively not to have a short-
age of oil in the domestic market and ensuring price stability for energy consumers. Some
fuel stations in regions and states are facing short supply and the fuel price skyrocketed.
The Petroleum Products Regulatory Department, under the guidance of the commit-
tee, is issuing the daily reference rate for oil to offer a reasonable price to energy consumers.
The reference rate in Yangon Region is set on the MOPS’ price assessment, shipping cost,
premium insurance, tax, other general cost and health profit per cent.The rates for regions and
states other than Yangon are evaluated after adding the transportation cost and the retail refer-
ence rates daily cover on the state-run newspapers and are posted on the media and official
website and Facebook page of the department on a daily basis starting from 4 May.
According to PPRD Data, 90 per cent of fuel oil in Myanmar is imported, while the
remaining 10 per cent is produced locally. The domestic fuel price is highly correlated with
international prices. Currently, the government is steering the market to mitigate the loss be-
tween the importers, sellers and energy consumers. Consequently, the government is trying to
distribute the oil at a reasonable price compared to those of regional countries.
Some countries levied higher tax rates and hiked oil prices than Myanmar. However,
Malaysia’s oil sector receives government subsidies and the prices are about 60 per cent
cheaper than that of Myanmar. Every country lays down different patterns of policy to fix the
oil prices. Myanmar also poses only a lower tax rate on fuel oil and strives for energy con-
sumers to buy the oil at a cheaper rate.

3.How do you think the proposal - "National income can be expanded by reducing taxes"?
Discuss your perspectives on this proposal.

Tax cuts are reductions to the amount of taxpayers' money that goes toward govern-
ment revenue. Since they save voters' money, tax cuts are always popular. Tax increases are
not.Tax cuts occur in different forms. Governments can cut taxes on income, profits, sales, or
5
assets. The cut can be a one-time rebate, a reduction in the overall rate, or a tax credit.Tax
cuts also include other types of tax benefits like tax deductions, loopholes, or credits.How tax
cuts affect the economy depends on the type of tax being cut. In general, tax cuts boost the
economy by putting more money into circulation. They also increase the deficit if they aren't
offset by spending cuts. As a result, tax cuts improve the economy in the short-term, but, if
they lead to an increase in the debt, they will depress the economy in the long-term.

Different Types of Tax Cuts are as follows :

Income Tax Cuts

Income tax cuts reduce the amount individuals and families pay on wages earned. When peo-
ple can take home more of their paychecks, consumer spending increases.

Capital Gains Tax Cuts

Capital gains tax cuts reduce taxes on sales of assets. That gives more money to investors.By
putting more money in investors' pockets, they are more likely to buy more stock in compa-
nies, helping the companies grow. It also drives up the prices of real estate, oil, gold, and
other assets.

Business Tax Cuts

Business tax cuts reduce taxes on a company's profits. The goal of these cuts is to give firms
more money to invest in growth, wages, and hiring.

 Small business tax cuts help entrepreneurs starting new businesses. This can help
add jobs since small businesses creation of all new private-sector jobs.
 Corporate tax cuts lower corporate income taxes. That gives corporations more money
to invest back into their businesses, which could, in turn, help create jobs.

 Payroll tax cuts lower the payments made to Social Security, Medicare,

The effects of Tax cuts to National Income are as follows:

 Tax cuts reduce taxpayers' burden but also increase the nation's debt.
 Cuts can boost growth, but they rarely do so enough to make up for the revenue lost.
 Cuts are most effective if tax rates are high or if the tax cuts occur during a recession.
 Tax cuts are always more popular than tax hikes.
6
7