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Comprensión de la política monetaria y fiscal y el costo del dinero - evaluación

  • Apuntes
  • Revisión por tema
    Emmanuel Anim A.
    GH
    Emmanuel Anim A.

    i enjoy learning this

    Ibrahim N.
    NG
    Ibrahim N.

    i have completed this course but certificate as not award to me.

    Lazarous M.
    ZW
    Lazarous M.

    Expansionary fiscal policy, the government reduces tax, increases fiscal activities and reduces tax to encourage savings and industrialise the economy.In flationary period, contractionary fiscal policy is used to ensure stability and deflationary of rocketing inflation.These measure are adopted to citizenary stability and economic competativeness of a country globally.To do this economic indicators like consumer price index and retail price index should be continuously calculated so that timeous measures are carried out whilst the country is not drawn into quagmire of poverty and dilemma.

    Lazarous M.
    ZW
    Lazarous M.

    who is responsible for ensuring economic growth?

    Haedar F.
    LB
    Haedar F.

    Clear and thanks to God

    Hasmin M.
    MY
    Hasmin M.

    fiscal policy is the use of govt spending and taxes to influence the nation spending,employment and price level while monetary policy is the changes of interest rate which changes investment and real gdp

    Hasmin M.
    MY
    Hasmin M.

    Monetary policy is set by the Central Bank, and therefore reduces political influence (e.g. politicians may cut interest rates in desire to have a booming economy before a general election) Fiscal Policy can have more supply side effects on the wider economy. E.g. to reduce inflation – higher tax and lower spending would not be popular and the government may be reluctant to purse this. Also lower spending could lead to reduced public services and the higher income tax could create disincentives to work. Monetarists argue expansionary fiscal policy (larger budget deficit) is likely to cause crowding out – higher government spending reduces private sector spending, and higher government borrowing pushes up interest rates. (However, this analysis is disputed) Expansionary fiscal policy (e.g. more government spending) may lead to special interest groups pushing for spending which isn’t really helpful and then proves difficult to reduce when recession is over. Monetary policy is quicker to implement. Interest rates can be set every month. A decision to increase government spending may take time to decide where to spend the money. However, the recent recession shows that Monetary Policy too can have many limitations. Targeting inflation is too narrow. This meant Central banks ignored an unsustainable boom in housing market and bank lending. Liquidity Trap. In a recession, cutting interest rates may prove insufficient to boost demand because banks don’t want to lend and consumers are too nervous to spend. Interest rates were cut from 5% to 0.5% in March 2009, but this didn’t solve recession in UK. Even quantitative easing – creating money may be ineffective if banks just want to keep the extra money in their balance sheets. Government spending directly creates demand in the economy and can provide a kick-start to get the economy out of recession. Thus in a deep recession, relying on monetary policy alone, may be insufficient to restore equilibrium in the economy. In a liquidity trap, expansionary fiscal policy will not cause crowding out because the government is making use of surplus saving to inject demand into the economy. In a deep recession, expansionary fiscal policy may be important for confidence – if monetary policy has proved to be a failu

    Hasmin M.
    MY
    Hasmin M.

    ple: Monetary policy is not the same as fiscal policy, which is carried out through government spending and taxation. To understand monetary policy, it is important to understand a bit about the Federal Reserve, which is the central bank of the United States. The Federal Reserve is a bank for banks. It has several branches around the U.S. hold deposits for and lend to banks. As a means of ensuring the safety of the nation's financial institutions, the Federal Reserve requires banks to keep a strict percentage of their deposits on reserve at a Federal Reserve bank. The Federal Reserve determines the appropriate percentage, called the reserve requirement. If a bank is unable to meet its reserve requirement, it can borrow from the Federal Reserve to meet the requirement. The interest rate on these funds is called the discount rate. (Banks can also borrow the excess reserves of other banks, and this interest rate, called the federal funds rate, is determined by the open market. The Federal Reserve works to keep the discount rate close to the federal funds rate.) Now, let's assume that policymakers feel employment is too low and interest rates are too high. The Federal Reserve could enact expansionary monetary policy and encourage economic growth by doing one or all of these three things: Direct the Federal Open Market Committee (FOMC) to purchase U.S. Treasuries on the open market Lower the reserve requirement Lower the discount rate Each of these choices increases the supply of money and creates a chain reaction. For example, when the FOMC (an agent of the Federal Reserve) purchases U.S. Treasuries in the open market, it gives money to the sellers. The sellers deposit these payments at their local banks. The banks then lend most of these new deposits to other bank customers and earn interest. These customers in turn deposit the loan proceeds in themit own bank accounts, and the process continues indefinitely. Thus, every dollar of securities that the Federal Reserve buys increases the money supply by several dollars. This in turn lowers the lending rate as there is more supply of loanable monies, thus encouraging growth. Likewise, if the Federal Reserve lowers the reserve requirement, more of a bank's deposits become available for lending. This increase in the supply of available funds lowers the price of those funds (i.e., the lending rate), making debt cheaper and more enticing to borrowers. With money being cheaper to borrow, individuals and companies are more likely to take out loans to build and improve, thereby growing the economy. Additionally, if the Federal Reserve lowers the discount rate, it becomes cheaper for banks to borrow money from the Fed, thus making it cheaper to lend to customers. This leads to the same outcome as both purchasing Treasuries and lowering the reserve requirement. Now consider what would happen if policymakers felt employment was too high and interest rates were too low. This may sound attractive, but it is a recipe for runaway inflation. If the Federal Reserve wants to encourage an economic slowdown (that is, implement restrictive monetary policy), it can do one or all of these three things: Direct the FOMC to sell U.S. Treasuries on the open market Raise the reserve requirement Raise the discount rate When the FOMC offers Treasury securities for sale, it bids up interest rates in order to entice investors, who take money out of their bank accounts to buy the Treasuries. This leaves less money in the banking system, which means banks have less money to lend. With less money to lend, the price (that is, the interest rate) on the remaining loanable funds increases, which in turn makes car loans, mortgages, and credit card purchases more expensive. This slows down demand and lowers prices across the economy. If the Federal Reserve increases the reserve requirement (which leaves less of a bank's deposits available for lending) or increases the discount rate (which makes it more expensive for banks to borrow money from the Federal Reserve, thus making it less lucrative to borrow money to lend to customers), it compounds the slow-down effects. Economists measure the effectiveness of monetary policy by its influence on inflation, employment, and industrial production. Most economists agree that because monetary policy often takes several months or even several years before the effects are felt, policy action is not something that should be taken in response to current, short-term economic conditions. One should note that monetary policy also has a global reach, in addition to its domestic effects. When the Federal Reserve's actions result in lower interest rates, this makes domestic bonds less attractive than bonds issued in countries with higher working capitals. Therefore, money tends to flow out of the U.S. and into these other countries. This causes demand for and thus the value of American dollars to fall in relation to other currencies, which makes the prices of American goods seem cheaper to foreign purchasers. This encourages them to import more American goods, raising the balance of trade. At the same time, improved demand from foreign sources causes more U.S. businesses to borrow money to expand, and this in turn leads to more jobs.

    Hasmin M.
    MY
    Hasmin M.

    cost of money The amount of profit that could be generated from interest payments on a given amount of money if it were invested in government bonds. The cost of money changes with variance in interest rates, and is used to gauge the opportunity costs involved in the potential investment of that money in securities or other assets.

    Hasmin M.
    MY
    Hasmin M.

    For now, let me say that designing a successful institutional framework for fiscal policy, refining the necessary governance, responsibilities, accountability and the like, is much more complex than is the case for monetary policy.4 Or at least, that’s the way it seems to me. Let me list a few of the reasons:     First, fiscal policy has many objectives, quite a few of which are extremely difficult to quantify. Second, there are trade-offs among this multiplicity of objectives, especially those that involve significant redistribution of resources. Third, unlike monetary policy, where there is a clear consensus about the long-run neutrality of money and the high costs of inflation, there is no such agreement over the long-run impact of government deficits and debt. Fourth, there is a deficit bias arising from the fact that politicians naturally forsake long-term stability for short-term prosperity. That said, in designing a framework for fiscal policy, we can build on the experience of the most successful central banks. Here are three lessons that may be helpful:    First, adopt an explicitly forward-looking orientation, including multi-year budgeting. We should require that any expansion or tightening of fiscal policy come with an indication of the future measures that will be needed to ensure fiscal sustainability. There is a growing consensus that, as is the case for monetary policy, the effectiveness of discretionary fiscal policy hinges on the expectations of future policy. Indeed, fiscal policy multipliers have been shown in recent research to vary quite dramatically depending on the type and size of future corrective measures. Second, improve communication and transparency, including the publication of what has been promised, to whom and by when. Fiscal policies put in place today have consequences for generations. Making fully informed decisions, ensuring intergenerational equity and constraining political largesse means clearly telling everyone about the consequences. Getting people to ask questions like “Will I get my pension? Will I be able to get decent medical assistance?” will go some way towards reducing short-term biases. And third, as I suggested a moment ago, we should adopt a more prudent approach to budgeting, including the creation of buffers both to guard against the consequence of forecasting errors and as contingencies. The government is, in many respects, an insurance company (providing insurance against natural disasters, financial crises, demographic changes and much more). Yet, its budget is based on cash flow accounting, without any compulsory reserves. To create such buffers against contingencies, fiscal authorities could accumulate budget surpluses in good times in order to provide a government with the ability and the debt capacity to respond in times of financial crisis. To draw an analogy with the banking sector, the government needs to build up fiscal buffers during good times that can be drawn down to support the financial system and the real economy in bad times.

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