MODULE 6: GROUP 6

• Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy
• Monetary policy is the actions undertaken by a nation's central bank to control money supply and achieve macroeconomic goals that promote sustainable economic growth
• Monetary policy tools

  • Open market operations
  • Direct lending to banks
  • Bank reserve requirements
  • Unconventional emergency lending programs
  • Managing market expectations
• Monetary policy can be broadly classified as either expansionary or contractionary
• Expansionary monetary policy maintains short-term interest rates at a lower than usual rate or increases the total supply of money in the economy more rapidly than usual
• Contractionary monetary policy maintains short-term interest rates greater than usual, slows the rate of growth of the money supply, or even decreases it to slow short-term economic growth and lessen inflation
• Reserves are money in hand or money that is available to be used for a wide range of possibilities, including meeting future planned payments, unexpected events, emergencies, opportunities, etc.
• Fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure (spending) to influence a country's economy
• Fiscal policy deals with taxation and government spending, often administered by a government department
• Monetary policy deals with the money supply, interest rates, often administered by a country's central bank
• Fiscal and monetary policies both influence a country's economic performance
• The economy is at "full employment" at a rate of around five percent
• Below full employment is when employers would be forced to pay higher wages to attract and retain workers, which in turn would compel them to raise prices, sparking inflation
• Phillips Curve is the theoretical trade-off between unemployment and inflation
• Higher rates of labor force participation contribute to faster economic growth
• When the process of workers rejoining the workforce slows, inflation could accelerate
• Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorized that government changes in the levels of taxation and government spending influences aggregate demand and the level of economic activity
• They are funds that individuals, companies, organizations, central banks, and governments set aside for future use or ‘just in case’
• Monetary policy tool is used by the monetary authority of a nation to control the money supply, often targeting a rate of interest to attain a set of objectives centered on the growth and stability of the economy
• Monetary policy is controlling the money supply either by increasing or decreasing it as well as adjusting interest rates
• Monetary policy is a measure undertaken by central banks. In the Philippines, Bangko Sentral ng Pilipinas (BSP) is primarily responsible for applying the country's monetary policy
• The Primary objective of monetary policy:

  • To maintain price stability conducive to a balanced and sustainable growth of the economy and employment
• Expansionary monetary policy intends to increase the level of liquidity or money supply which could result in relatively higher inflation in the economy
• Contractionary monetary policy is aimed at decreasing the level of liquidity or money supply which could result in relatively lower inflation in the economy
• Ample reserves is abundant amount of excess reserves, meaning it has reserves that are more than what are considered necessary for immediate financial stability. It provides financial security, policy flexibility, and economic stability
• Limited reserves are inimum amount of reserves required to meet immediate obligations. It reduces financial security, policy flexibility, and economic stability
• Open market operations - buying or selling government securities
• Fiscal policy


  The use of government revenue collection (taxes or tax cuts) and expenditure (spending) to influence a country's economy
• 3 Components of fiscal policy

  • Revenue policy
  • Expenditure policy
  • Debt management policy
• Revenue policy or revenue generation policy is policy in raising revenues rooted on the "ability to pay" concept. Revenue generation must be equitable and efficient, administratively feasible to implement, and projections should be realistic
• Expenditure policy - funds are disbursed for the efficient delivery of services to the public and to help in economic growth by supporting priority sectors
• Debt management policy is policy to attain a manageable debt level where the country can afford to pay its maturing liabilities as scheduled
• Fiscal institutions in the government (DICC)

  • Development Budget Coordination Committee
  • Implementing agencies
  • Congress
  • Commission on Audit
• Fiscal position of the government reflects the government's financial condition for the year, summarizing total revenue collections and expenditures, and the resulting surplus or deficit
• Budget as a fiscal policy instrument and development tool

  • Sets the direction and pace of economic growth and development. During recession, the government is expected to pump prime the economy. In better times, the government is expected to give way to private participation and initiatives. The budget must address critical priorities and thrusts of the government
• Key differences between monetary and fiscal policies

  • Authority
  • Tools
  • Objective
  • Implementation
• Price stability refers to a situation where the general price level remains relatively constant over time
• Full employment is when all available labor resources are utilized, and there is no involuntary unemployment
• Objectives of price stability

  • Maintaining purchasing power
  • Promoting economic efficiency
  • Encouraging saving and investment
• Objectives of full employment

  • Maximizing economic output
  • Social stability
  • Sustaining consumer confidence