Government macroeconomic objectives and policies

Expansionary fiscal policy

increase in Government spending and a fall in Taxation

cons of expansionary fiscal policy

• Demand pull inflation and current account deficit —> tradeoffs

• worsening of gov finances - may rack up more debt

• crowding out - typically happens when the government borrows money to finance its spending, which can raise interest rates, making it more expensive for businesses and consumers to borrow money

• time lags

evaluation of fiscal policy

• Size of the output gap

• Size of the multiplier

• Consumer/Business Confidence

• State of Gov Finances

• LR returns to the GOV

• Laffer curve ideas

• Role of automatic stabilisers

• Crowding out vs Crowding in

• Classical view of self-correcting economy in a recession

What is an automatic stabiliser

Automatic stabilisers are automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when unemployment is rising.

Quantitative easing

Central bank may use to increase the supply of money in the banking system designed to encourage commercial banks to lend at cheaper interest rate

Monetary policy

Involves changes in interest rates, the supply of money and credit and exchange rate by the central bank to influence the macro-economy and achieve target outcomes

Interest rates

The amount you’re charged to borrow money

Central Bank can set official monetary policy interest rates, which then affect the interest rates offered by banks to borrowers and savers.

Lowering IR can stimulate borrowing and spending, while raising them can reduce borrowing and spending to control inflation

What are government securities and what does selling them mean.

• Government securities are debt instruments issued by the government to raise money. These could be things like bonds or Treasury bills, where the government borrows money from investors with a promise to pay it back with interest after a certain period.

• When a central bank sells government securities, it is essentially offering these bonds or Treasury bills to private banks or investors. The central bank receives money from the buyers in exchange for these securities.

Open Market Operating

Central banks buy and sell government securities in the open market to influence the money supply Purchases inject money into the economy, while sales withdraw money

Central Banks

Monetary authority and major regulatory bank in a country. A central bank is responsible for operating monetary policy and maintaining financial stability