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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?

To determine

To discuss : The inferiority or Superiority of Monetary policy with regards to fiscal policy.

Explanation

Fiscal policy is the policy of the government. It is government’s tool to influence output, employment and prices in the economy.

A contractionary fiscal policy of the government refers to use of government spending to decrease the aggregate demand, output, employment and prices in the economy. It includes:

  1. Increase in business taxes to reduce after tax profits.
  2. Increase in individual income taxes to decrease the disposable income and hence to decrease the consumption.
  3. Reducing government purchases of final goods and services to reduce aggregate demand directly.

An expansionary fiscal policy of the government refers to use of government spending to increase the aggregate demand, output, employment and prices in the economy. It includes:

  1. Cuts in business taxes to increase profits.
  2. Cuts in individual income taxes to increase the disposable income and to increase the consumption.
  3. Increasing government purchases of final goods and services to increase aggregate demand directly.

Monetary policy is the tool of the central bank of a country by which it influences money supply, prices and output in the economy...

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