Explain discretionary and automatic fiscal policy. Why might a government budget for a deficit or surplus? Under what circumstances might a government restrict international trade?

Welcome back — missed you this week. 7. a) Discretionary fiscal policy is a deliberate change in government spending or taxation by policymakers in response to economic conditions, requiring legislative action. Automatic fiscal policy, on the other hand, refers to built-in stabilizers like progressive income taxes and unemployment benefits that automatically adjust government spending or taxation without explicit government action, helping to moderate economic fluctuations. 7. b) Governments budget for a deficit or a surplus for several reasons: • Budget Deficit: Governments may budget for a deficit to stimulate economic growth during a recession by increasing government spending or cutting taxes. They might also do so to fund public investments in infrastructure, education, or healthcare, or to respond to emergencies like wars or natural disasters. • Budget Surplus: A government might budget for a surplus to reduce the national debt, thereby lowering future interest payments. Surpluses can also be used to cool down an overheating economy by reducing aggregate demand, or to build up reserves for future economic downturns or demographic challenges. 8. a) A government can restrict international trade under several circumstances: • Protection of Infant Industries: To shield new domestic industries from foreign competition until they are mature enough to compete globally. • National Security: To prevent the export of strategic goods or technologies to potential adversaries, or to ensure self-sufficiency in critical sectors. • Protection of Domestic Jobs: To safeguard local employment from cheaper foreign imports that could lead to job losses in domestic industries. • Prevention of Dumping: To counteract foreign firms selling goods in the domestic market at prices below their production cost, which can harm local industries. • Correction of Balance of Payments Deficit: To reduce imports and improve the country's trade balance when it is experiencing a persistent deficit. • Protection of Public Health, Safety, or Environment: To ban imports of products deemed unsafe, unhealthy, or produced using environmentally harmful methods. • Retaliation: To respond to trade barriers or unfair trade practices imposed by other countries. 8. b) The external value of a currency in a freely operating exchange market will likely increase due to: • Increased Demand for Exports: When a country's goods and services are in high demand internationally, foreigners need to buy more of its currency to pay for these exports, increasing the currency's value. • Higher Interest Rates: If a country's central bank raises interest rates, it attracts foreign investors seeking higher returns on their savings and investments, increasing the demand for the domestic currency. • Strong Economic Growth and Stability: A robust and stable economy attracts foreign direct investment and portfolio investment, as investors are confident in the country's prospects, leading to increased demand for its currency. • Low Inflation: A low and stable inflation rate preserves the purchasing power of the currency, making it more attractive to both domestic and foreign investors. • Political Stability: A stable political environment reduces investment risk, encouraging foreign capital inflows and boosting demand for the currency. • Speculation: If currency traders anticipate that a currency's value will rise in the future, they will buy it, driving up its current value. Send me the next one 📸