Macroeconomic policy instuments

Discuss, using the AD and AS model, the ways in which fiscal, monetary and supply side policies can effeect unemployment, infaltion, economics growth and the ucrrent account position of the balance of payments in both short or long run.

  • Created by: Michael
  • Created on: 24-05-11 10:35


Fiscal -  the taxation and spending decisions of a government.

Monetray policy - central bank and or government decisions on the rate of interest, the money supply and the exchange rate.

Supply side policies - policies designed to increase aggregate supply by improving the effieciency of labour and product markets.

Fiscal policy is one of the three main economics policies that the governmtent use to influence economic activity and to achieve their macroeconomic policy objectives. the other two are monetary and supply side policies.

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Fiscal policy

Fiscal policy covers the taxation and spending decisions of a governtment. the government can change tax rates, and the composition, amount and timin of government spending.

The aim of fiscal policy is to influence AD. the government can raise AD either by incresing its own Spending decision or by reducing taxation. (Gs) is componento of  AD.

It could spend on e.g computers in school which will directly increase AD. This higher spending will also be likely to have a multiplier effect, causing AD to rise even further.

A cut in income tax will increase people's disposalbe income. This will raise consumption and again AD. lower corporation tax would tend to increase

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Methods of funding

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

  • Taxation
  • Seigniorage, the benefit from printing money
  • Borrowing money from the population or from abroad
  • Consumption of fiscal reserves.
  • Sale of fixed assets (e.g., land).

All of these except taxation are forms of deficit financing

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