Monetary and Fiscal Policies- Economics

• Money


  The set of assets in an economy that people regularly use to buy goods and services from other people
• Commodity Money


  Money that takes the form of a commodity with intrinsic value
• Fiat Money


  Money without intrinsic value that is used as money because of government decree
• Medium of Exchange


  Any item that buyers give to sellers when they want to purchase goods and service
• Liquidity


  The ease with which an asset can be converted into the economy's medium of exchange
• Monetary Policy


  The setting of the money supply by policymakers in the central bank
• Central Bank


  An institution designed to oversee the banking system and regulate the quantity of money in the economy
• Unit of Account


  The yardstick/unit people use to post prices and record debts
• Store of Value


  An item that people can use to transfer purchasing power that can be withheld for future use.
• What is Money?


  1. Set of assets in the economy that people REGULARLY use to buy goods and services from each other
• Functions of Money

  • Medium of Exchange
  • Unit of Account
  • Store of Value
• Types of Money

  • Commodity Money
  • Fiat Money
• Fiat Money


  Money without intrinsic value that is used as money by government decree
• Currency


  The paper bills and coins in the hands of the public
• Demand Deposits


  Balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card at a store
• Monetary Policy


  Decisions by the Central Bank concerning the size and growth rate of the money supply
• Expansionary Monetary Policy


  1. Decision to Increase the money supply

  2. Decrease the interest rate on loans to banks or by purchasing public bonds (loans to GOB or corporations)

  3. Boosts private sector borrowing

  4. Increases consumer spending

  5. Increases prices

  6. Lowers unemployment
• Contractionary Monetary Policy


  1. Decision to Decrease the money supply

  2. Increase the interest rate on loans to banks or by selling government bonds (loans to GOB or corporations)

  3. Reduces private sector borrowing

  4. Reduces consumer spending

  5. Reduces inflation

  6. Increases unemployment
• Fiscal Policy


  Decisions by the Central Government concerning the level of government spending (budget decisions) and/or taxation
• Expansionary Fiscal Policy


  1. Decision to Increase government spending and/or taxes will be reduced to stimulate the economy

  2. Increases disposable income and consumer spending

  3. Decrease in government revenue

  4. Decrease unemployment

  5. Increase demand and output

  6. Higher taxes in the future (usually borrowed funds to expand)
• Contractionary Fiscal Policy


  1. Decision to Decrease government spending and/or increase taxes often to manage budget deficits or debt servicing purposes

  2. Reduces disposable income and consumer spending

  3. Increase in government revenue

  4. Decreases nominal GDP

  5. Reduces price level
• Wealth -

  Accumulation of physical and intangible assets (after subtracting all debts)