Transcript Central banking, money and taxation

Tools of macroeconomic
policy
&
Central banking
Tools of macroeconomic policy:
Monetary and fiscal policy
Fiscal policy
= A government policy on taxes and public
spending.

Monetary policy
= The central bank’s policy on controlling the
money supply.

What can these two policies be used for?
Macroeconomic policy can be expansionary
(1) or restrictive (2). Decide which
definition is which policy:
[ ] increases the total supply of money in the
economy, used to combat unemployment in
a recession.
[ ] decreases the total money supply in order to
combat inflation.
What can these two policies be used for?
Macroeconomic policy can be expansionary
(1) or restrictive (2). Decide which
definition is which policy:
[1] increases the total supply of money in the
economy, used to combat unemployment in
a recession.
[2] decreases the total money supply in order
to combat inflation.
RB, p. 62/I.2
Which terms are defined here?




The total amount that different sectors of the
economy spend in a given period.
A situation in which all available labor resources
are being used in the most economically efficient
way. It is the highest amount of skilled and
unskilled labor that could be employed within an
economy at any given time.
An amount produced or manufactured during a
certain time
An economic system with no barriers to free
market activity.
RB, p. 62/I.2
Which terms are defined here?




The total amount that different sectors of the
economy spend in a given period. – aggregate
demand
A situation in which all available labor resources
are being used in the most economically efficient
way. It is the highest amount of skilled and
unskilled labor that could be employed within an
economy at any given time. – full employment
An amount produced or manufactured during a
certain time – output
An economic system with no barriers to free
market activity. – open market
RB, p. 62/I.2
Which terms are defined here?


Minimum amount of cash or cash-equivalents
(a percentage of deposits) that banks and
other depository institutions are required by
law to keep on hand, and which may not be
used for lending or investing.
The interest rate charged to commercial
banks and other depository institutions for
loans received from a central bank’s discount
window.
RB, p. 62/I.2
Which terms are defined here?


Minimum amount of cash or cash-equivalents
(a percentage of deposits) that banks and
other depository institutions are required by
law to keep on hand, and which may not be
used for lending or investing. – reserve
requirements
The interest rate charged to commercial
banks and other depository institutions for
loans received from a central bank’s discount
window. – discount rate
RB, p. 62/ I Find answers in
text:

When should a loose/tight monetary policy be
used?
What should be done?
How?

Do: RB, p. 63/ II


MONE PROBLEM
TARY
POLIC
Y
economy in
recession:
GOAL
EXPANSIONARY (LOOSE)
stimulate
economy:
↓
below its full- to increase
employment
borrowing &
potential
spending
↓
to encourage
output
MEASURES
increasing money
supply:
-lowering reserve
requirement
-dropping discount
rates
-buying more
bonds
↓
-lower interest
rates
 people will
spend
MONETARY
POLICY
RESTRICTIVE (TIGHT)
PROBLEM
Overheating economy:
too much pressure on production capacity,
rising prices
GOAL
cool economy:
to lessen loan availability →lower investments
→ to reduce aggregate demand
to reduce aggregate demand
reducing money supply:
-raising reserve requirement
- increasing discount rates
- selling bonds
↓
- higher interest rates
- less available loans  less investment
MEASURES
RB, p. 63/ III
presenting:
Practice
e.g.
If the economy IS
INRECESSION/OVERHEATING, the central
bank should STIMULATE/ COOL IT.
This can be done by LOWERING/RAISING the
reserve requirement, DROPPING/
INCREASING the discount rate, or by
BUYING/SELLING bonds on the open market.