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Fiscal and Monetary Policy

Fiscal Policy
seeks to control aggregate demand by altering the balance between government spending and taxation
Budget Deficit
an excess of government spending over taxation
Budget Surplus
the excess of governments receipts over its spending
Public Sector Net Cash Requirement/ Public Sector Borrowing Requirement
Public Sector
includes general government and public corporations e.g. BBC
General Government
includes central and local government (Members of Parliament and Council)
Selling to the Central Bank
increases Money Supply/
Money Creation
Central Bank sells on Debt to Public
Reduction in Money Supply
smoothing out peaks and troughs in the business cycle
derived or originating internally
When the economy expands
it dampens growth
when the economy shrinks
it encourages growth
Strength of fiscal stabilisers
depends on marginal propensity to tax (mpt)
Monetary effects of fiscal policy
Withdrawals increase with Output
Injections= Exogenous
The Goods Market
measures Withdrawals, Injections and Income etc.
The Money Market
Money Supply and Demand, compared to interest rates.
Discretionary Fiscal Policy
Lump sum taxation or non automatic stabilisation
Why Expansion?
The Bank may be concerned that the growth of in output is too low or negative
Why Contraction?
The Bank may be concerned that the economy is growing too fast, or that prices are rising too quickly- economy is out of control, in need of dampening
Banks may pass loan accounts to non-regulated banks if the reserve ratio is reduced. If there is demand for money then banks will create it
If Interest Rates are already close to 0
Monetary rates can become completely ineffective

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