Economics 9: FISCAL & MONETARY POLICY
FISCAL & MONETARY POLICY
Government 3 objectives (macro-economy):
o Control inflation: sustained increase of price levels
o Control unemployment
o Stimulate economic growth (“increase in real GDP”)
2 entities to achieve these goals:
o Executive branch of government (Government) fiscal policies
o Central bank (Government can’t interfere) monetary policies
Provides banking services and supervision
Advisors to government
Responsible for controlling money and credit supply in
economy (electronic money, all money in bank, and ability to
borrow/loan)
Note: Without credit, economy will crash because
people can’t afford shit
Note: Politicians might print money and give out,
causing inflation
Fiscal: (Government use spending and taxes to control economy by stimulating
it or slowing it down)
o Taxes
o Government spending
(expenditure)
Expansionary policy: stimulates economic
growth: more spending: demand increases
shifting curve out (politicians prefer what
voters want) increases AD this adds to
country’s debt! As AD increase country move
, to full employment critical to the contractionary phase of business cycle
(recession)
o Increase government spending
o Lower taxes
Contractionary policy: decrease AD
slowing economy
o Raise tax
o Decrease government
spending (less money to spend
and circulate)
Note: These graphs shift the same way for
both monetary and fiscal policy (by
government and central bank)
Keynesian government think government should manage economy as it won’t
stabilize itself
Keynes argue that people hold money for:
The transactions motive (day to day spending)
The precautionary motive (unexpected expenditures)
The speculative motive (avoid capital losses)
Monetary policy: changes to money supply to achieve macroeconomic goals
To expand money supply, the central bank may:
Lower reserve requirement
Lower discount rate
Buy government bonds
Monetary: When central bank act to change money/credit supply
FISCAL & MONETARY POLICY
Government 3 objectives (macro-economy):
o Control inflation: sustained increase of price levels
o Control unemployment
o Stimulate economic growth (“increase in real GDP”)
2 entities to achieve these goals:
o Executive branch of government (Government) fiscal policies
o Central bank (Government can’t interfere) monetary policies
Provides banking services and supervision
Advisors to government
Responsible for controlling money and credit supply in
economy (electronic money, all money in bank, and ability to
borrow/loan)
Note: Without credit, economy will crash because
people can’t afford shit
Note: Politicians might print money and give out,
causing inflation
Fiscal: (Government use spending and taxes to control economy by stimulating
it or slowing it down)
o Taxes
o Government spending
(expenditure)
Expansionary policy: stimulates economic
growth: more spending: demand increases
shifting curve out (politicians prefer what
voters want) increases AD this adds to
country’s debt! As AD increase country move
, to full employment critical to the contractionary phase of business cycle
(recession)
o Increase government spending
o Lower taxes
Contractionary policy: decrease AD
slowing economy
o Raise tax
o Decrease government
spending (less money to spend
and circulate)
Note: These graphs shift the same way for
both monetary and fiscal policy (by
government and central bank)
Keynesian government think government should manage economy as it won’t
stabilize itself
Keynes argue that people hold money for:
The transactions motive (day to day spending)
The precautionary motive (unexpected expenditures)
The speculative motive (avoid capital losses)
Monetary policy: changes to money supply to achieve macroeconomic goals
To expand money supply, the central bank may:
Lower reserve requirement
Lower discount rate
Buy government bonds
Monetary: When central bank act to change money/credit supply
