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15 Cards in this Set
- Front
- Back
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Demand Management
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Use of Monetary and Fiscal Policy to staibilize Income around a high average level.
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How Does Fiscal Policy aim to stabilize Economy
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Taxation and Gov't Expenditure - Money is redistributed to benefit payments and/or services. (Public Goods)
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What are Taxes and Subsidies used for
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To encourage or discourage certain behaviours and/or purchases (smoking, Drinking, Farm subsidies to keep local farmers employed)
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How are taxes and Subsidies collected
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Direct and Indirect Taxes on income, purchases, corporate profits
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How does Taxation affect Fiscal Policy
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• Direct Taxes can be increased to reduce spending • Higher Income Tax can be used or Corporation Tax reduces spending because of decrease in Purchasing Power
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How Does Gov't Expenditure affect Spending
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• Reduction in Expenditure and Increase in taxes reduces AD • Increase in Spending and/or Reduction in taxation increases AD via Multiplier Effect
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How Does Monetary Policy affect AD
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• Monetary Policy Regulates the Money Supply, Credit, and Interest Rates • Typically, Interest Rate and/or exchange rate is changed to influence AD
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What do Monetary Authorities do to influence Credit
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• Open Market Operations - Buy/Sell Bonds to alter Commercial Banks Deposit Base • Special Deposit - Freezing a portion of banks assets so they do not lend • Directive - Request made by monetary authorities to control lending••
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Problems with Monetary Policy
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• No Reliable Definition, Money would transfer to different levels • International Implications are hard to influence. Credit Contraction could lead to increase of inflows into the country, thus unintentionally raising interest rates • Time Lags between Policy election and desired effects
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Transmission Mechanism to affect Inflation
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•Change Bank Reserves → Change Bank Lending → Change in Money Supply→ Change Interest Rates → Change Expenditure→ Change Inflation
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How do you ensure policy is on the right track
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• Target Macroeconomic Variable Indicators and Intermediate Targets are used to ensure proper effects are taking place
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Examples of Transmission Mechanisms
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• Increase interest Rates to discourage Mortgages • Decrease Interest Rates for variable rate Mortgages to increase Purch Power • Low Interest Rates increase big purchases • Low Rates increase investment spending as cost of capital is low • Low Rates depreciate domestic currency value and increase exports • Redistribution of income for savers and borrowers - low interest rates lenders lose money to variable loans •
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Differences between Fiscal and Monetary Policy
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• Fiscal Policy can be targeted, whereas Monetary is more broad-based • Monetary Policy can be ineffective in Recessions • Monetary Policy has quick implementation, Fiscal has long implementation • Effects take longer to be felt in Monetary whereas Fiscal Policy can be felt immediately
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Problems with Demand Management Policies
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• Measuring impact and output is difficult • Time lags in all aspects of policy decisions • Choices of fiscal Policy (Tax Cuts or Spending increases) • Crowding out effect of Fiscal Policy • Trickle down effects of Policy decisions (will they destroy other objectives) • Fiscal Policy is weak when investment is sensitive to interest rates • FP is weak when consumers anticipate and make offsetting decitions • Monetary policy is weak when saving rates are high
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Factors influencing total demand for money balances
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• Price Level • Interest Rate Level • GDP Level • Pace of Financial Innovation
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