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Monetary Policy - Coggle Diagram
Monetary Policy
Aims
External Balance
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Causes: For external balance to occur, it is a current position that can be sustained and both notions can be used
Stable Rate of Inflation
Fixes: The government can use wages and price controls and decrease the money supply within the economy.
Causes: Many different reasons can occur to inflation. These reasons can include government regulation, devaluation, and rising wages.
Low Unemployment
Causes: Unemployment can be due to many different reasons such as slow economic growth, supply mismatch, and global reccesion.
Fixes: Cutting taxes to boost aggregate demand, cutting interest rates, and a sustained economic growth
What is it?
A policy which is used by the goverment in order to promote a strong and sustainable growth by using government spending and taxation.
Real World Examples
Just recently, the financial minister of New Zealand announced that fiscal rules should be expected. This is in response to the government failing to reach their targets of fiscal rule due to it being suspended in 2020 due to the pandemic. The financial minister also said "It's really important that we use fiscal policy sensibly to be able to make sure New Zealand not only keeps a lid on debt but that we invest in the right things,"
The ministers of Euro Zone are ready to plan a tightening of the fiscal policy amidst the Russian-Ukraine war. Due to this war, the euro zone growth will be 0.5 times slower and inflation is set to average at 5.1% in 2022.
In early 2020, the US senate announced a fiscal stimulus worth $2 trillion. This was due to the economic fallout that was caused by the covid-19 pandemic and the funds would be used for a coronavirus relief package
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Types
Contractionary ++
Main focal points are to increase taxes, or to decrease the level of government spending
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Expansionary
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It is a form of Keynesian demand management which is believed that there should be an intervention by the government. This type of policy is to be based on 3 types of measurements which are:
In order to encourage a lower rate of consumption, the government can lower the income taxers in order to increase the disposable income and would result in an increase of the aggregate demand
To encourage greater investments, the government can lower the corporate taxes so that people can enjoy the after tax profits at a higher level which can also be used for investments, which would ultimately result in an increase of aggregate demand
For the public services to improve, the governments can invest in project themselves which will mean more spending by the government, thus increasing government spending, and thus a higher level of aggregate demand
Government Debt
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Whilst the percentage of government budget expenditure increases due to interest payments increasing, this could be a negative effect on other types of spending which the government may have to cut
If certain governments hope to maintain the level of the benefits and the services, it would require for a higher rate of tax in order to fund the expenditure
Government Debt can lead to a decrease of ability for the government to respond to such emergincies within the economy. The governments does tend to borrow money during such circumstances, however it would lead to higher debt and they would have much less options for fiscal policy.
Effeciency of the Policy
Cons
There can be time lags, meaning that it would take time in order to apply the policy and start seeing progress in the shifting of aggregate demand
Political pressure can occur if the spending and taxation is influenced by political factors rather than economic
The government may need to be within a budget deficit to fund the expansionary policies and it could lead to unsustainable national dept when looking in terms of the long run, ultimately leading to not being able to fund the public spending
An increase of spending through borrowing can occur within the government which is known as the crowding out effect. This means that the firms will be unable to access their funds that were used for investments which would mean the total investments will fail.
Governments will be unable to achieve their targets as it would be difficult to adjust toa new policy because of the government spending and the changes in tax are large which would affect many different areas of the economy
Pros
Governments can also use their funds and have them be invested into sectors of the economy that they believe will lead to the greatest benefit.
The spending by government and its expenditures can be used as a target for specific sectors within the economy
In the long run, the fiscal policy is effective with dealing with the reccesionairy period