Fiscal policy

balancing between government spending and taxation to control aggregate demand

purpose: correcting a fundamental disequilibrium
fine tuning: like increasing VAT
to influence aggregate supply
Financing a deficit: solve by borrowings
General government: running army services and national health services, street lighting
Local government raising tax: when you own a property then we need to pay for that. Which
would be 2,000 a year. This is based on the type of property.
Central government raising tax: income tax
PSNCR: Public Sector Net Cash Requirement
amount of money government should raise to finance public services
excess of public sector spending then public sector receipts
The PSNCR is the amount of money the government has to borrow to meet its
expenditure. Governments often spend more than they receive in tax revenue and the
only way to plug the gap is to borrow. The PSNCR is the total level of borrowing required
each year to make these ends meet.

Fiscal policy: Government spending policies that influence macroeconomic conditions. These

policies affect tax rates, interest rates and government spending, in an effort to control the
economy.

Government surplus will be built up when there is more employment. Why?

Don't have to give out unemployment benefits
More income tax can be accumulated
income tax is an automatic fiscal stabilizer
there is benefits stabilizers
two multipliers
injection multipliers : 100 percent multiplier effect
tax multipliers: we get lesser effect. Why? it is because
if gov. reduce tax rate from 20 to 10percent? then with our extra money we
would save and buy imports.
Keynesians: Correcting this disequilibrium
this point, gov should run deficit and borrow money in order to balance the two
left wing government.
effectiveness of automatic stabilizers
adverse supply-side effects
the gov. would not like it to happen if disincentive for people to work as well as
investments such as other companies' coming in to my country to set up.
the problem of fiscal drag
when income increases then the multiplier would be reduced.
Discretionary policy: problems of forecasting the magnitude of the effect
high levels of gov. brings higher interest rate
when interest goes up
imports higher exports lower (cause it is harder)
financial account: go up
current account: deficit
crowing out: increased public expenditure replacing private-sector expenditure
accelerator and multiplier: when injection line shifts
national income increases
aggregate demand is going up
more machines will be bought to meet demand
induced investment: when the economy is going up then make the company to buy more machine to
meet demand: aggregate demand

replacement investment
Monetary Policy
degree of independence of central bank
If government control the liquidity ratio of the bank:
when it requires bank to set high liquidity ratio
bank will make less credit created, possibly no increase.
open-market operations
buyer makes profit by buying then resell
Cause of growth in the money supply
the central bank sells fewer securities to the banking sector
the central bank takes measures to reduce the exchange rate
public-sector borrowing is financed by selling Treasury bills to the banking sector
But this is not the cause of growth of money supply:
The central bank imposes a statutory reserve ratio on banks that is higher than their
current reserve ratio

if banks have surplus liquidity, they buy bills.