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Monetary policy vs Fiscal policy - Coggle Diagram
Monetary policy vs Fiscal policy
monetary policy
decrease interest rates
improve aggregate demand
consumption
durable goods cheaper -> cheaper on credit -> increase in demand -> increase in consumption
Mortgage repayments -> decrease in mortgage repayments -> discretionary income increases -> increase in consumption
Asset prices -> increase in wealth effect -> consumer confidence -> increase in MPC -> increase in consumption
decrease in saving (opportunity cost) -> decrease in the incentive to save (return on saving decreases) -> increase in MPC -> increase in consumption
investment
decrease cost of borrowing -> increase in expected rate of return on capital -> MEC -> increase in investment
not always lead to a decrease in aggregate demand
liquidity trap
where interest rates are decreased and does not lead to increased levels of consumption or investment
exacerbated by low levels of animal spirits
quantitative easing
aggrgegate demand
an increase in government bonds demanded -> increase in the price of the government bonds -> a decrease on the yield of the bond -> decrease in interest rates -> increase in consumption
this usually takes a long time to revitalise the economy
fiscal policy
taxation
aggregate demand
decrease in tax -> an increase in disposable income -> increase consumption
aggrgegate supply
a decrease in taxation -> a decrease in the costs of production (trade, emissions, raw materials) an increase in money going elsewhere -> an increase in production
government spending
aggrgegate demand
government spending is a factor of aggregate demand
aggregate supply
increase in government spending, firms spend less on costs of production, increase in production
increase in government spending, multiplier effect, increase in wages, increase in consumption, also increase in government spending
crowding out
the government over spends -> they need to buy private loanable funds -> increase in demands for these funds -> raising the price of the funds -> the price is governed by interest rates -> therefore increasing interest rates -> decrease in consumption
ricardian equivalence
consumers are forward looking and are know about how the government's budget will help them in the future
this could backfire and still not let consumption increase -> no multpilier -> decrease in ad
this is a more immediate form of revitalising the economy
they need to work in unison because in recent times it has been down to monetary policies however, as seen they cannot do anymore, only fiscal policy can help now