What Is Monetary And Fiscal Policy

The money supply will increase as the components of AD (C+I) rise. Figure 2 illustrates the increase in money supply through showing the rightward shift of the MS curve, from MS1 to MS2. The money demand will remain the same (MD). Therefore, increasing the money supply will lower the interest rate from i1 to i2. This is partly due to the increased availability of money. More money around means it is easier to acquire and thus command lower interest rates. However, such an increase in money supply may also increase the inflation rate and possibly cause a hyperinflation if uncontrolled.

The governments mainly reduce spending cuts and increases tax on both the nation and firms, and back to applying economics belief, the action will only cause a contraction of the aggregate demand of the whole economy, hence, reducing GDP. It is reported that the fiscal measure includes a 60 percent revenue and 40 percent spending cuts. These actions, has decreased the willingness of firms and companies to invest since the after-tax return has been reduced. Next, the of cutting government spending can also mean less jobs for the peoples in the public sector. Unemployment rate increasing from 9.4% to 11.3% (Ferreira.Joana,2017). Using the multiplier effect will be the best to explain, when there is less jobs for the people, it will mean no income for the unemployed and a drop in purchasing power, more importantly it will be very hard for the people to pay the high taxes. It is also reported that the bailout money has all been used to repay the banks instead of using it to correct the

Tax decreases can stimulate economic growth because if people are paying less in taxes, they have more money to spend. It has been proven over the years that tax decreases generate economic growth and federal revenue will always rise. From a personal standpoint I always spend more during tax season because I usually get a good return; since I am a single parent and full-time student, therefore, I qualify for various tax breaks. These obviously affect my household because I am more disposable income. Tax decreases can help a business if their taxes are decreased the organization will payout less and have more income.

Furthermore, if the interest rate was low before the cut then it may not appear to have a very big impact because people will have already have been taking advantage of the small cost of borrowing. Obviously if the interest rate was very high discouraging people from borrowing and in turn reducing consumer expenditure and investment by firms, then a rapid cut could see a high rise in the aggregate demand. Moreover, if someone is in the middle of paying back a mortgage on something like a house and interest rates fall they will effectively have more money because they will not be paying more on top of their mortgage on interest.

If the taxes for business are lowered, the businesses will be able to increase employment, and that will lead to the unemployment rate further decreasing, which will improve economic growth. In addition to that, the businesses will spend more on supplies and as it spends more on supplies, other businesses will get higher demand, and that will lead to more money that can be spent on multiple things such as hiring people, and improving production, and management efficiency. Eventually, this will be a ripple effect, and the Canadian economy will

Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy—on such macroeconomic variables as GNP and unemployment and inflation.

Janet Yellen states, “the possibility that low long-term interest rates are a signal that the economy's long-run growth prospects are dim….depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for--as we all know--economic growth lies at the heart of our nation's, and the world's, future prosperity.” A high interest rate is usually set when an economy is already well off. An example of an economy that's well off is with the result of inflation. But if inflation is left unchecked it will lead to a loss of purchasing power meaning that your dollar is worth less than what it was before. This is where high interest rates become a great convenience to the economy. Though this may sound proficient, ultimately a high interest rate that lasts lead to struggles within the economy. Borrowing will become more difficult due to rates being to high which will also cause less productivity to

How will Trump affect interest rates? Trump can improve the overall condition of the economy by guiding the

Higher interest rates are never a good idea for a growing economy because it can directly impact it. Higher interest rates can affect

Over the past couple of years we have seen a huge surge in stock markets (Chart#1). The main reason for such moves is Quantitative Easing monetary policy provided by Federal Reserve System since late 2008. Purchases were halted on 29 October 2014 after accumulating $4.5 trillion in assets or 26% of GDP. The key outlook is tend to be consumer behavior, because households’ spending represents two thirds of GDP, which is broadest measure of economic activity. The job market is considerably stronger right now. Since June last year, payroll employments expanded by $2.2 million jobs (Chart#2), which represents 2.4 percent annual rate of increase. As a result, incomes are rising rapidly. For the same period real

A decreasing economy means a lack of inflation. With lower prices on goods, people can be encouraged to spend more. Lower prices also bring lower rates. This decrease in rates during a downturned economy can actually advantageous for people. People can take advantage of lower rates and make bigger purchases, this both saves the buyer money and also leads to a better economy by adding to the federal reserve. The economy is fluid and tenuous. It's many contributing factors including the reserve, supply and demand, along with countless other impactors like the job market, stocks, etc., create a fluctuation in rates every

The Federal Reserve 's actions affect the economy because changes in the real interest rate affect planned spending. For example, an increase in the real interest rate raises the cost of borrowing, reducing consumption and planned investment. Thus, by increasing the real interest rate, the Fed can reduce planned spending and short-run equilibrium output. Conversely, by reducing the real interest rate, the Fed can stimulate planned aggregate expenditure and thereby raise short-term equilibrium output. The Fed 's ultimate objectives are to eliminate output gaps and maintain low inflation. To eliminate a recessionary output gap, the Fed will lower the real interest rate. To eliminate an expansionary output gap, the Fed will raise the real interest rate.

Interest rates are normally associated with inflation. Consumer spending and economic growth is encouraged as a result of low interest rates. However, inflation can occur if supply is lower than demand due to consumption increases but this is indeed not a bad outcome though foreign trade and investment will be lacklustre as opposed to the cash rate being higher which more likely attracts foreign investment and trade.

Governments make use of different macroeconomic policy instruments such as fiscal and monetary policies to stabilize the macro-economy and brig about growth to their respective countries. Yet there are debates on the efficiency of each of these instruments. Some economists argue that fiscal and monetary policies are ineffective in all countries while the other group argue that they are important policy tools, though their effectiveness depends on conditions in the economy.

Increased spending on investment adds to aggregate demand and helps to restore normal levels of production and employment.Fiscal policy, on the other hand, can provide an additional tool to combat recessions and is particularly useful when the tools of monetary policy lose their effectiveness. When the government cuts taxes, it increases households’ disposable income, which encourages them to increase spending on consumption. When the government buys goods and services, it adds directly to aggregate demand. Moreover, these fiscal actions can have multiplier effects: Higher aggregate demand leads to higher incomes, which in turn induces additional consumer spending and further increases in aggregate demand.Traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes. When the government gives a dollar in tax cuts to a household, part of that dollar may be saved rather than spent. The part of the dollar that is saved does not contribute to the aggregate demand for goods and services. By contrast, when the government spends a dollar buying a good or service, that dollar immediately and fully adds to aggregate demand.