AEEEK0014 Principles of Economics PDF

AEEEK0014 PRINCIPLES OF ECONOMICS GROUP D ROSLAN BIN ABDUL HAKIM Professor of Economics School of Economics, Finance and Banking UNIVERSITI UTARA MALAYSIA  CHAPTER 8 FISCAL POLICY AND MONETARY POLICY At the end of this chapter, you be able to: ❑Explai...

AEEEK0014 PRINCIPLES OF ECONOMICS GROUP D ROSLAN BIN ABDUL HAKIM Professor of Economics School of Economics, Finance and Banking UNIVERSITI UTARA MALAYSIA  CHAPTER 8 FISCAL POLICY AND MONETARY POLICY At the end of this chapter, you be able to: ❑Explain the government's budget. ❑Describes the tools of fiscal policy. ❑Explain how expansion fiscal policy implemented. ❑Explain how contraction fiscal policy implemented. ❑Explain the monetary policy instrument. ❑Describe the impact of the implementation of monetary policy in AD and AS model (changes in AD and AS curves). ❑Distinguish expansion monetary policy and contraction  TYPES OF BUDGET 1. BALANCED 2. SURPLUS 3. DEFICIT BUDGET BUDGET BUDGET The government’s The government’s The government’s total expenditure total expenditure total expenditure is equal to its is less than its is more than its total revenue. total revenue. total revenue. SOURCES OF GOVERNMENT REVENUE TAX REVENUE NON-TAX REVENUE TAX REVENUE NON-TAX REVENUE SOURCES OF REVENUE NON-REVENUE RECEIPTS  TYPES OF TAXES DIRECT TAXES Tax paid by the person on whom it is levied which cannot be passed on to another person. TYPES OF TAXES INDIRECT TAXES Burden of tax can be passed on to another person.  government’s actions to influence an economy through the use of taxation and spending GOVERNMENT AD=(Y)= C + I + G + X-M POLICY C= Consumption Fiscal Policy I = Investment (private) G= Government expenditure X = Export M = Import TYPES OF FISCAL POLICY Expansionary fiscal policy Contractionary fiscal policy When economy is in When economy is in recession inflation Increases the government Decreases the government expenditure expenditure Decreases the tax Increases the tax Expansionary Fiscal Policy P Figure shows the effect of expansionary fiscal policy during the economic recession. P0 and Y0 is the AS initial equilibrium level in the economy (AD0 intersect with AS). When government implement expansionary FP (↑ G, ↓ T) AD ↑. When there is an P1 e1 increase in AD (AD0 to AD1), the level P0 e0 AD1 of output ↑ from Y1 to (YF). The same AD0 goes for the price level. Y Y1 YF CONTRACTIONARY FISCAL POLICY Contractionary Fiscal Policy Figure shows the effect of a P contractionary monetary policy AS during inflation. P0 and Y0 is the initial equilibrium level in the economy (AD0 intersect with AS). When the governments P0 e0 implement contracted FP (Lower P1 e1 AD0 G and ↑T), AD ↓. When AD ↓ AD1 (AD0 to AD1), the level of output ↓ from Y0 to Yf.The same goes Y for the price level. Yf Y0  ▪ government’s actions to influence an economy through the Bank Negara Malaysia (the Central Bank of Malaysia) ▪ to promote monetary and financial stability GOVERNMENT ▪ Two instruments: Quantitative Instruments POLICY Qualitative Instruments ❑ Monetary Policy  Instruments in Monetary Policy Quantitative Instruments Qualitative Instruments Open market Fixing Margin Requirements operations(OMO) Consumer Credit Regulation Reserve requirement (RR) Publicity Credit Rationing discount rate (DR) Moral Suasion Control Through Directives Direct Action  TYPES OF MONETARY POLICY ❑ Expansionary monetary policy ❑ Contractionary monetary policy When economy is in recession When economy is in inflation ❖Increasing money supply in the ❖Decreasing money supply in the economy, lowers interest rates and economy, higher interest rates and increases aggregate demand (AD) decreases aggregate demand (AD) ❖Government decreases the RR, ❖Government increases the RR, decreases the DR and buy bond in an increases the DR and sell bond in an open market open market Expansionary Monetary Policy The figure shows the effects of P expansionary monetary policy during recession. P0 and Y0 is the initial AS equilibrium level in the economy (AD0 intersect with AS0). When CB implement expansionary MP (buy bonds in the OMO, ↓ RR, ↓ DR), MS P1 e1 ↑, r will ↓, I will ↑, AD ↑. When there is P0 e0 AD1 an increase in AD (AD0 to AD1), the AD0 level of output ↑ from Y1 to YF. The Y same goes for a price level. Y1 YF CONTRACTIONARY MONETARY POLICY Contractionary monetary Policy P P0 and Y0 is the initial equilibrium level in the AS economy (AD0 intersect with AS). When the governments implement contracted MP e0 (increases DR and RR and P0 e1 AD0 sell bond), AD ↓. When AD ↓ P1 AD1 (AD0 to AD1), the level of output ↓ from Y0 to Yf.The Y same goes for the price level. Yf Y0