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Copy of MONEY
Transcript of Copy of MONEY
Monetary Policy Monetary Policy It is a macroeconomic policy which involves the regulation of the money supply. Fiscal and Monetary Policies Keynesian View of Fiscal Policy Fiscal policy and the Crowding-Out Effect The theory behind the crowding-out effect assumes that governmental borrowing uses up a larger and larger proportion of the total supply savings available for investment. A budget deficit is present when total government must borrow funds to finance the excess of its spending relative to revenue.
A budget surplus is present when the government's revenues exceed its total expenditures. 1. Proper timing of discretionary fiscal policy is both difficult to achieve and of the crucial importance.
2. Automatic stabilizers reduce the fluctuation of aggregate demand and help to direct the economy toward full employment.
3. Fiscal policy is much less potent than what early Keynesian view implied. Prior to 1960's the desirability of a balanced budget was widely accepted among the business and political leaders. Keynesian economists, however, were highly critical of this view. Keynesians argued that governmental budget should be used to promote a level of aggregate demand consistent with the full employment rate of output. Basic Types of Monetary Policy Expansionary Monetary Policy
Contractionary Monetary Policy Aggregate output
increases by the increase in investment Interest rate
increases Money supply
increases Expansionary Monetary Policy
Problem: Recession and Unemployment Aggregate demand increases Price level rises Aggregate output
decreases by the
investment Interest rate falls Investment
decreases Money supply
decreases Restricted or Tight Monetary Policy
Problem: Inflation Aggregate demand
declines Price level falls Money Market Equilibrium Inflation Targeting: The BSP's Approach to Monetary Policy Requirements for the Successful Adoption of Inflation Targeting Firm commitment to price stability
Central bank independence
Sound financial system (Ms)=(Md) Money Supply (Ms) Function of Money Money as medium
of exchange Money as a
unit of account Money as a store of value Measuring Money Supply (MS) M1 or Narrow Money M2 or Broad Money M3 or
Liabilities M4 Demand and Supply
1. Simple Framework
2. Allows greater
focus on the goal of
4. Reflects a
comprehensive income Features of Inflation Targeting:
6. Increase the
7. Does not depend
on the assumption How inflation targeting is actually done?