Essay Macro Economins
School of Business
Lecture note: 5
Shish Haider Chowdhury firstname.lastname@example.org Cell: 018 19225594
02 March 2012
Fiscal Policy and Monetary 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 …show more content…
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.