Essay Macro Economins

5377 Words Mar 14th, 2013 22 Pages
University of Liberal Arts Bangladesh (ULAB)
School of Business

MBA Programme
Spring 2012
Lecture note: 5

Course Teacher:
Shish Haider Chowdhury Cell: 018 19225594

02 March 2012

Fiscal Policy and Monetary Policy

Fiscal Policy
Government's revenue (taxation) and spending policy designed to: (1) counter economic cycles in order to achieve lower unemployment, (2) achieve low or no inflation, and (3) achieve sustained but controllable economic growth. In a recession, governments stimulate the economy with deficit spending (expenditure exceeds revenue). During period of expansion, they restrain a fast growing economy with higher taxes and
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Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance.

Methods of funding

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways: • Taxation • Seigniorage, the benefit from printing money • Borrowing money from the population or from abroad • Consumption of fiscal reserves. • Sale of fixed assets (e.g., land). [All of these except taxation are forms of deficit financing.]


A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors.

Consuming prior surpluses

A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring additional debt.

Economic effects

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