Notesale: Turn your study into money

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FISCAL POLICY: to control aggregate demand, also used to influence aggregate supply
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) first role is to prevent
the occurrence of fundamental disequilibrium in the economy
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Expenditure in order to boost the economy
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(doladenie)
EXPANSIONARY FISCAL POLICY: used to prevent an economy a severe or prolong recession
(experienced in 1930 Great Depression, 1990 Asia, Russia, Brazil)
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DEFLATIONARY FISCAL POLICY: could be used to prevent to prevent rampant inflation (like
experienced in 1970)
DISCRETIONARY FISCAL POLICY: If there is a fundamental disequilibrium in the eco or substantial
fluctuations in other injections and withdrawals, the gov may choose to alter the level of gov
expenditure or the rates of taxation
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In UK changes in taxation and in some gov
expenditure announced by the Chancellor of the Exchequer in the Budget, some if these changes
apply to the coming financial year, some apply to the next year other even after one more
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If gov exp
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Two main problems: magnitude of the effects,
if G or T is changed, how much will total injections and withdrawals change? 2
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In any one year is
where central go expenditure (including benefits) exceeds its revenue from taxation
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Tax revenues exceed central
go expenditure
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The effect of this will be to reduce the level of fluctuations in national
income without the gov having to take any deliberate action
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Debt that the gov
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If gov runs deficits over many years = debts will
accumulate
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National debt not the same as the country´s overseas
debt
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GENERAL GOVERNMENT: includes central and local gov
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AUTOMATIC FISCAL STABILISERS: Taxes whose revenues rise as national income rises and benefits
that fall as national income rises are called autom
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The more taxes rise
or benefits fall, the bigger the marginal tax propensity
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Can never be the complete answer to the problem
of fluctuations
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Suffer two specific drawbacks: adverse
effects on aggregate supply and the problem of fiscal drag
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The more they change with income, the bigger the
stabilising effect on national income
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The higher tax rate, more likely to create disincentive to work and to
invest
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High unemployment benefits may increase
equilibrium unemployment, may encourage people to spend longer looking for the “right” job, rather
then taking the first job offered, =increasing unemployment, shifting the Phillips cure to the right,
because no longer average period of job search represents a higher level of friction in the economy=
thus a higher level of friction in the economy= the higher natural(equilibrium) unemployment
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The higher level of income relate benefits, the
more steeply they taper off, the greater will be the problem of the poverty trap
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Help to reduce upward and downward movements in national incomefine if the current level of income is the desirable level*
FISCAL DRAG: tendency of automatic stabilisers to reduce the recovery of an economy from
recession
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By reducing the size of the multiplier, the AS reduce the magnitude of the recovery
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APPROACH TO FISCAL POLICY IN THE UK: from 1998 Uk gov set targets for gov expenditure for 3 year
not only one
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Interest rates have gained a central significance in macroeconomic policy
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M P
have a major influence on a whole range of macroeconomic indicators
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Gov must decide on what the goals of the policy are
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Sets the policy and decides the measures necessary to
achieve it
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The gov to set policy targets, central bank given independence in deciding
interest rates – this is today in UK, gov has set a target rate of inflation of 2 % , then the MPC is free
to choose the rate of interest
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Central bank given independence not only in carrying out policy but
in setting the policy targets itself
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Last question, gov or central bank should take a long-term or short-term perspective,
adopt a target for inflation or money supply growth and stic to it? Adjust its policy as circumstances
change and attempt to fine-tune the economy? Short-term M P: policy used to keep to a set target
for inflation or money supply growth, policy used to smooth out fluctuations in the business cycle
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Money supply

grows too rapidly inflation is likely to be high
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Two major sources of monetary growth banks choosing to hold a lower liquidity ratio (probably in
response to an increase in the demand for loans and public sector borrowing financed by borrowing
from the banking sector
BANK LIQUIDITY RATIO: central bank could impose a statutory minimum reserve ratio on the banks,
above the level that banks would otherwise choose to hold
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Effect
of minimum reserve ratio to prevent banks choosing to reduce their cash or liquidity ratio and
creating more credit
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Major
problem with restrictions that banks my find ways of getting round them-very difficult to regulate
and police every single complex financial system
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Focus on the two major approaches to monetary policy: controlling the money supply and interest
rates
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Second
alter the size of the bank deposits multiplier, by altering the ratio of reserves to deposits
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OPEN MARKET OPERATIONS: four techniques that a central bank could use to control the money
supply ( assume in each case that the central bank wishes to reduce money supply)O M O are the
most widely used, alter the monetary base (cash in circulation outside the central bank) The sale(or
purchase) by the authorities of gov securities in the open market in order to reduce (or increase)
money supply
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Alter the overall liquidity position of the banks
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) to reduce the money supply the central
bank issues more bonds and fewer bills
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Monetarist: in favour of using M P rather than F P as a means of controlling inflation, seeing
inflation as purely the consequence of excessive growth in the money supply, prefer to set firm rules
(targets for inflation)and then stick to them

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