Policies for Economic Development

In my opinion, this condition illustrates an economic contraction in the business cycle because the impact of the COVID-19 pandemic has affected the business cycle in Indonesia, this is represented by a decrease in people's purchasing power, and a decrease in investment resulting in the growth of small and medium-sized businesses (Small and Medium Enterprises). MSMEs- in Indonesia have stagnated and do not bring profits and income for business actors in Indonesia. As a result, this has also led to massive lay-offs due to the depletion of income and the inability to finance the company's operations. Given this condition, the government takes crucial steps in dealing with this situation, which are as follows:

2. Monetary Expansive Policy

Expansive monetary policy is a policy in order to increase the money supply. This is done by lowering interest rates, purchasing government securities by the central bank, and lowering reserve requirements for banks. This policy is carried out to overcome unemployment and increase people's purchasing power (public demand) and stimulate business activities or consumer spending activities when the economy is in a recession or depression.

3. Fiscal Policy

Fiscal policy has 3 (three) stimulus as a movement of change, namely:

a)  Acceleration of government spending

The government is accelerating the disbursement of capital expenditures, accelerating the appointment of state treasury officials, conducting tenders, accelerating the disbursement of social assistance expenditures and transfers to regional and village funds. The purpose of this acceleration is to gradually adapt to new habits, resolve problems that occur after the pandemic, and strengthen reforms to get out of the middle income trap.

b) Income tax relaxation

The government eases the amount of tax by covering Article 21 income tax, exemption from import income tax contained in Article 22, reduction of Article 25 income tax, and accelerated VAT refunds. In addition to the relaxation of income taxes, the government has also simplified and accelerated the export-import process. Export-import acceleration is prioritized for leading traders, simplification of funds for reducing export and import restrictions (manufacturing, food and medical support), and export-import services through the national logistics ecosystem.

c)    National economic recovery by implementing State Finance policies through relaxation of the State Budget. The relaxation of the state budget prepares for a deficit that can exceed 3 percent with the goal that in 2023 it will return to a maximum level of 3 percent. Relaxation will be related to the allocation of spending between organizations, between functions, and between programs and mandatory spending. Relaxation of allocation or reallocation of Regional Government Expenditures, Loans to LPS, Issuance of SUN and SBSN to be purchased by Bank Indonesia, BUMN, corporate investors and/or retail investors. The use of alternative budget sources includes SAL, education endowment funds, and funds managed by the Public Service Agency.

4. Policies from the government in allocating APBD

The Regional Government plays a strategic role in encouraging the acceleration and effectiveness of economic recovery as well as understanding the regional economic structure, demographics, and socio-economic conditions of the people during the pandemic. Local governments have the main benchmark to encourage economic recovery, namely the policies that have been designed in the APBD.

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2. With help of AD-AS model, predict the impact on equilibrium GDP and price level in the short-run under the following circumstances. You also need to explain which elements of GDP that will be affected using the basic equation for aggregate output, or the national income identity (Y = C + I + G).

a. The central bank decreases the money supply.

b. The government increases fiscal deficit.

c. The government increases value added tax (VAT) rate.