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Fiscal policy and Monetary policy - Coggle Diagram
Fiscal policy and Monetary policy
Fiscal Policy
Expansionary fiscal policies
To overcome
recession
Increase Government Spending
Decrease taxes
Consumption, Investment and Aggregate demand will increase
Contractionary fiscal policies
To overcome
inflation
Increase taxes
Decrease Government Spending
Consumption, Investment and Aggregate demand will decrease
Implemented by
Government
Also known as budgetary policy
Budget Surplus
The level of anticipated
receipts exceeds
the level of expected
expenditure
(G<T)
.
Budget Deficit
The level of anticipated
receipts is less than
the level of expected
expenditure (G>T)
.
Balance Budget
The level of anticipated
receipts equals
the level of expected
expenditure (G=T)
.
Automatic Stabilisers
Ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle. (
Without government intervention
)
Discretionary stabilisers
Government makes a deliberate change
in government expenditure or taxes rates to influence the level of aggregate demand.
Effect/ Problem
Information Problems
Fiscal drag
Crowding Out
Government may increase aggregate demand too much or too little
Time Lags
Monetary Policy
Loose Monetary Policy
Decrease Interest Rates
To overcome
recession
Increase money supply
Consumption, Investment, Inflation, Unemployment rate will increase
Implemented by
Bank Negara Malaysia
Tight Monetary Policy
To overcome
inflation
Increase Interest Rate
Decrease money supply
Consumption, Investment, Inflation, Unemployment rate will decrease
Overnight Cash Rate/ Overnight Policy Rate (OPR)
The minimum interest rate set by central bank for overnight loans between financial institution (commercial banks)
e.g.: 10% reserve ratio
Effect/Problem
The Time lag to recognition
The time lag between recognition and action
The time it takes for changes in the official cash rate to flow through to other interest rates which more directly affect aggregate demand.
The time lag between changes in interest rates and the resulting changes in GDP, prices, and employment.
Open Market Operations (OMO)
A central bank
buying or selling short-term bonds
and other securities in the open market to influence the
money supply
, thus influencing short term
interest rates
Loose monetary policy
Central bank
purchases
government bonds from commercial banks
Increase money supply, reduce interest rate
Overcome
recession
Tight monetary policy
Central bank
sells
government bonds to commercial banks
Reduce money supply, increase interest rate
Overcome
inflation