SEU Macroeconomics Case Study Worksheet


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Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 2
ECON201 (1st Term 2021-2022)
Deadline: 15/11/2021 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: I
Academic Year: 1442/1443 H, 1st Term
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
Level of Marks: High/Middle/Low
This assignment is an individual assignment.
Due date for Assignment 2 is 15th November 2021.
The Assignment must be submitted only in WORD format via allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
Submissions without this cover page will NOT be accepted.
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Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment Purposes/Learning Outcomes:
After completion of Assignment-2 students will able to understand the
LO 1.2: Describe how to evaluate macroeconomic conditions such as unemployment,
inflation, and Growth
LO 1.3: Recognize the fundamental determinant’s of a nation’s long-run economic
Assignment 2 Questions: Week 6 to Week 10: – [5 Marks]
Assignment 2
Case Study
When taxes induce people to change their behaviour—such as inducing Jane to buy less
pizza—the taxes cause deadweight losses and make the allocation of resources less
efficient. As we have already seen, much government revenue comes from the individual
income tax in many countries. In a case study in Chapter 8, we discussed how this tax
discourages people from working as hard as they otherwise might. Another inefficiency
caused by this tax is that it discourages people from saving.
Consider a person 25 years’ old who is considering saving $1,000. If he puts this money in
a savings account that earns 8 percent and leaves it there, he would have $21,720 when he
retires at age 65. Yet if the government taxes one-fourth of his interest income each year,
the effective interest rate is only 6 percent. After 40 years of earning 6 percent, the $1,000
grows to only $10,290, less than half of what it would have been without taxation. Thus,
because interest income is taxed, saving is much less attractive.
Some economists advocate eliminating the current tax system’s disincentive toward saving
by changing the basis of taxation. Rather than taxing the amount of income that people
earn, the government could tax the amount that people spend.
Under this proposal, all income that is saved would not be taxed until the saving is later
spent. This alternative system, called a consumption tax, would not distort people’s saving
Various provisions of the current tax code already make the tax system a bit like a
consumption tax. Taxpayers can put a limited amount of their saving into special
accounts—such as Individual Retirement Accounts and 401(k) plans—that escape taxation
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
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College of Administrative and Financial Sciences
until the money is withdrawn at retirement. For people who do most of their saving through
these retirement accounts, their tax bill is, in effect, based on their consumption rather than
their income.
European countries tend to rely more on consumption taxes than does the United States.
Most of them raise a significant amount of government revenue through a value-added tax,
or a VAT. A VAT is like the retail sales tax that many U.S. states use, but rather than
collecting all of the tax at the retail level when the consumer buys the final good, the
government collects the tax in stages as the good is being produced (that is, as value is
added by firms along the chain of production). Various U.S. policymakers have proposed
that the tax code move further in direction of taxing consumption rather than income. In
2005, economist Alan Greenspan, then Chairman of the Federal Reserve, offered this
advice to a presidential commission on tax reform: “As you know, many economists
believe that a consumption tax would be best from the perspective of promoting economic
growth—particularly if one were designing a tax system from scratch—because a
consumption tax is likely to encourage saving and capital formation. However, getting
from the current tax system to a consumption tax raises a challenging set of transition
1: What should be taxed – Personal Income or Personal Consumption and
why? Provide your opinion based on the case.
(200 words) [1.5 Marks]
2: How may it affect Saudi Economy if an income tax is imposed in KSA?
(200 words) [1.5 Marks]
Q2: Saudi Arabia’s Ministry of Human Resources recently announced an increase to the
monthly minimum wage from 3000 SAR to 4000 SAR for full-time Saudi workers in
April 2021, and introduced a Labor Reform Initiative (LRI) scheduled to take effect on
14th March 2021.
[2 Marks]
a. Discuss the implications of the above topic.
b. Will this impact unemployment in the country? How?

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