Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand. The objectives of the government are: 1. low inflation CPI = 2% 2. Strong economic growth. 3. To Reduce unemployment 4.
During an economic recession, Keynes advocated increased government spending and lower taxes to give people more disposable income to spend, in an effort to stimulate demand and get the economy out of the depression. As a result, a demand side theory was developed which refers to the idea that optimal economic performance could be achieved (and preventing economic slumps) by manipulating aggregate demand through stabilization and policies enforced by the government which include monetary easing and fiscal expansionary policies. Similarly Keynes, in times of economic growth, advocates consumerism, but asks for higher taxation to reduce budget deficits. What is Keynesian Economics? In Keynes’ ... ... middle of paper ... ...dor, Robert Solow and Paul Davidson.
This shift would create a new equilibrium point with the LM curve. This new point will have naturally increasing interest rates, which will help inflation, rise to the target point. It is up to government to decide on which fiscal policy would be most effective. However, if we cut taxes on consumers, one can expect that consumption would increase among consumers, and overall GDP would increase. Again, the Federal Reserve is looking to control the growth of the economy by raising Fed rates, so once can expect that once that natural inflation rate would need to increase before action is
By budgeting for a deficit or surplus, the government will contract or expand the economy. e.g If the government needed to cut unemployment they would budget for a deficit so more money is injected and less money is taken from the economy by less taxes and higher expenditure raising employment. Monetary policy can also raise the level of economic activity. It controls the availability of money by influencing the level of interest rates. Lowering interest rates encourages people to spend and borrow while higher interest rates encourages people to save and not borrow.
(Dodge, 2011) Monetary policy is the central bank’s use of increasing or decreasing the money supply or the base rate of interest to influence the level AD. It can be expansionary - used to take the economy out of recession by increasing the money supply and the interest rates and therefore increasing the AD. It can also be contractionary - used when country is above the level of full employment to decrease the AD by an increase in the interest rate and money supply. Whether it is fiscal or monetary policy, they are both aimed to achieve the four macro economic objectives, which are: low unemployment, price stability, high but sustainable economic growth, good balance of payments. Let’s look at the application of these policies in the real life by the government and central bank.
These revenues also used, using austerity measures, to pay off deficits. An example would be in 2010, when the Conservative government increased VAT using austerity measures in order to “fast-track the elimination of Britain’s budget deficit.” If there are no taxes, then government would have to increase borrowing, thus increasing the Public Sector Net Cash Requirement, a term used for budget deficit. Governments also impose tax to control market failure. In an economy, there are negative externalities, or a consequence from a particular economic activity... ... middle of paper ... ...l benefit the poorer individuals in the economy. Again, similar to supply side policy, lower rates will result in lower costs of factors of production.
Bartavia has two means by which it can conduct an expansionary fiscal policy to promote even lower levels of unemployment thru economic growth. To do this the government can either cut taxes or increase spending increasing the money supply for consumers. However, one of the Ten Principles of Economics is that society faces a short-run trade-off between inflation and unemployment. Therefore, to reduce unemployment in the short-run, Batavia will have to increase inflation. Aside from inflation, there are also other risks related to executing an expansionary fiscal policy that only targets unemployment.
This essay will assess research into the impact of globalization on inflation and discuss whether it has weekend the ability of central banks to control the dynamics of inflation. The ability of central banks to control the rates of inflation may be substantially complicated by the increased globalization of the goods markets, factor markets and the financial markets (Woodford, 2007). The ability of national banks to influence the dynamics of inflation through monetary policy may be undermined by globalization. The central bank’s primary goal is to maintain price stability by regulating the level of inflation through monetary policy. Globalization increases trade both within and across countries (Schwerhoff & Sy, 2013).
A Report of the Committee on Fuller Capital Account Convertibility accepted that volatility in exchange rate is caused due to flexible exchange rate policy, inflationary pressure and capital inflow. It recogniz... ... middle of paper ... ...porting the hypothesis. The Aloy and Gente Paper (2005) demonstrated that a country’s population structure has an impact on the overall spending, savings, affecting the purchasing power parity and thus the exchange rate. Other principal factors that cause fluctuations in the exchange rate include the central bank’s intervention, supply of foreign exchange reserves, public debt, trading terms and political stability. Renu Kohli (2002) also attempted to check whether specific factors like structural changes in exchange rate regime, loosening of foreign exchange restrictions and trade liberalization in India had an impact on the real exchange rate.
An increase of investment and consumption will drive up the output of the economy and increase job opportunity, while it may seems like an excellent plan, however, inflation will eventually take place as the consumption overlaps the supply of goods and the general price will then increase. In the meantime, to achieve a stable price level, government will need to increase interest rate and reduce spending that will reduce the consumption and investment, hence, slowing down the economics growth (Mankiw, 2012). 1.3.3 Economics Growth & Equilibrium of BoP Economics growth will encourage the consumers to increase their consumption by reducing taxes, increasing government spending and other factors. The greater the economy growth, the greater the purchasing power, and this signified greater consumption on imported goods. The higher marginal propensity of import will lead to the deficit in the BoP.