Lecture 11 Monetary.pptVIP

Lecture 11: Monetary Fiscal Policy Influencing the state of the economy Purpose of the lecture Briefly review the main macroeconomic models Bring together the main macroeconomic models to show the effect of selected macroeconomic policies Briefly discuss the trade-off between employment and inflation The purpose of policy Maintain long-term growth Stabilise the economy Moderating the business cycle Maintain employment levels where possible Control inflation Policy options for recessions Do nothing Lower costs and wages will result in an eventual increase in output. Stimulate aggregate demand with monetary policy Stimulate aggregate demand with fiscal policy Do nothing (market correction) The limits of self-correction Hardship for some households Adds to long-term unemployment Adds to consumer producer pessimism Political unrest Monetary Policy and Aggregate Demand The process of monetary policyExpansionary Contractionary Central bank buys securities O’night cash rate increases Interest rates increase Increase in consumption investment Increase in aggregate demand Central bank selld securities O’night cash rate decreases Interest rates decrease Decrease in consumption investment Decrease in aggregate demand The result of expansionary monetary policy When to use expansionary policy Growth rate is low; and Consumer and investor sentiment is pessimistic; but Inflation should also be low Stimulation increases prices Fiscal Policy Aggregate Demand Fiscal Policy Fiscal policy refers to the government’s choices regarding the overall level of government purchases or taxes. Fiscal policy influences saving, investment, and growth in the long run. In the short run, fiscal policy primarily affects the aggregate demand. Fiscal Policy The Federal government’s control of the economy is both direct and indirect. Its expenditures have a direct effect on aggregate demand. Taxes and tax policy have an indirect effect on consumer spending. The Multiplier Effec