Macroeconomy – Monetary Policy

subject Type Homework Help
subject Pages 9
subject Words 1506
subject School N/A
subject Course N/A

Unlock document.

This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Expansionary Policies; Monetary and Fiscal
1
Expansionary Policies; Monetary and Fiscal
Course Name
Date:
Instructors Name
Expansionary Policies; Monetary and Fiscal
2
Introduction; Recession and Policy responses
Recession is formally defined as situation the where output growth is negative for two
consecutive quarters i.e. when we have negative output growth for two consecutive quarters, the
situation is known as Recession. It is the period in which unemployment rises, consumer and
investor confidence falls and economy moves downwards on business cycle. There are mainly
two policies to deal with this menace; monetary policy and fiscal policy. Monetary policy is run
by the central bank of a particular country while fiscal policy is run (or conducted) by the
government of that respective country. During recession, both government and central bank is
required to follow expansionary policies i.e. government will follow expansionary fiscal policy
and central bank will follow expansionary monetary policy. We would first talk about
expansionary fiscal policy; its meaning, its tools, how it is conducted and how it affects the
economy to overcome the recession. And next we will discuss about expansionary monetary
policy and its impacts on economy.
Expansionary fiscal policy; meaning, role and its impact on economy
Fiscal policy is a policy that concerns with government expenditure and taxes i.e. it is a
policy in which decision regarding government expenditure and taxes are taken. There are two
main tools of fiscal policy:
1. Government expenditure: expenditure by government in purchasing goods and
services, in factor payments, in development activities etc.
2. Tax: direct tax, indirect taxes etc.
Under recessionary environment, the objective of the government would be to increase in
aggregate demand because increase in aggregate demand would create employment and income
which would help the economy to come out of recession and therefore it is likely to follow
page-pf3
Expansionary Policies; Monetary and Fiscal
3
expansionary fiscal policy. Under expansionary fiscal policy; tax are reduced or government
expenditures are increased or both. If taxes are decreased, we would see increase in the
disposable income of households and hence consumption expenditure by households will
increase, causing aggregate demand to increase. Similarly, if government expenditures are
increased, aggregate demand will increase (as government expenditure is an important
component of aggregate demand). The increase in aggregate demand is important to bring the
economy out of recession. When aggregate demand increases, it would generate employment
which would generate income. Since consumption is a function of income, there would be
increase in consumption expenditure which would become income for other households and in
this way, there would be increase in income and unemployment by multiple times. This whole
process of increase in income is known multiplier process which helps the economy to come out
page-pf4
page-pf5
page-pf6
page-pf7
page-pf8
page-pf9

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.