Macroeconomic Policies: Monetary and Fiscal Policy

These flashcards provide essential vocabulary and definitions regarding expansionary and contractionary monetary and fiscal policies, their tools, and their impact on macroeconomic aims based on the provided lecture notes.

Monetary Policy

A demand side policy used to boost or reduce the $AD$ of goods and services to achieve macroeconomic aims of the government using tools such as money supply, interest rate, and exchange rate.

Money Supply ($MS$)

The amount of money in the economy at a particular point of time, consisting of coins, bank notes, bank deposits, and central bank reserves.

Expansionary Monetary Policy

A policy used to stimulate $GDP$ and economic growth ($EG$) where the central bank increases the money supply ($MS \uparrow$) and encourages commercial banks to lend out more money.

Contractionary Monetary Policy

A policy used to solve inflation by decreasing the money supply ($MS \downarrow$) and discouraging commercial banks from lending, thereby reducing borrowing and spending.

Interest Rate ($IR$)

The cost of borrowing; a reduction ($IR \downarrow$) stimulates spending and expansion, while an increase ($IR \uparrow$) discourages borrowing to curb inflation.

Exchange Rate ($ER$)

The value of domestic currency; a fall in value (e.g., moving from $USD \, 1 : RM \, 3$ to $USD \, 1 : RM \, 5$) makes exports cheap and imports expensive.

Time Lags

A limitation of monetary policy referring to the period of time it takes for a policy change to have its full effect on the economy.

Fiscal Policy

A demand side policy used to achieve macroeconomic aims by managing government spending (expenditure) and taxation (revenue).

Expansionary Fiscal Policy

A policy used to stimulate $GDP$ and economic growth ($EG$) by increasing government spending and decreasing taxation to boost aggregate demand.

Contractionary Fiscal Policy

A policy used to solve inflation by decreasing government spending and increasing taxation, resulting in decreased spending and aggregate demand ($AD < AS$).

Disposable Income

The amount of money remaining for spending and saving after taxes; a decrease in income tax lead to an increase in disposable income ($Disposable \, income \uparrow$).

Progressive Taxation

A tax system where the rich pay a higher proportion of their income for tax, with revenue redistributed by the government to the poor.

Healthy Balance of Payment ($BOP$) Surplus

A macroeconomic aim achieved when the value of exports is greater than the value of imports ($Exp > Imp$).

Demand-pull Inflation

Inflation that occurs when aggregate demand is greater than aggregate supply ($AD > AS$), leading to an increase in the price level ($PL \uparrow$).

Redistribute of Income & Wealth

A macroeconomic aim achieved through progressive taxation and government spending on state welfare benefits and subsidies for education and healthcare for the poor.