Chapter10FiscalPolicyandMonetaryPolicy

1、1Chapter 10Fiscal Policy and Monetary Policy2Todays QuoteThe governments view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan3Todays QuestionsWhy does the Chinese government invest s

2、o much money on infrastructure constructions?What measures does the government have to deal with unemployment / inflation?4Fiscal Guidelines 51. The Objectives of Economic PoliciesFull EmploymentStable PricesContinuous growthBalanced international account62. Fiscal PolicyFiscal policy is the use of

3、revenue collection and government spending to influence the economy.The fiscal system is mainly comprised of two aspects, i.e. fiscal revenue and government spending. 7Fiscal RevenueTaxes: Non-tax revenues:In-the-budget revenueOff-the-budget revenue (e.g. land-transferring fees, which is a crucial s

4、ource of funds for local governments).Fiscal Revenue of China (2007)Source: China Statistical Yearbook 20088Government spending Government purchases:Arms purchase, administrative expenses, payment to government officials, public projects, etc. Transfer payment.Social security, government aid, and al

5、lowances. 9Main Items of National Government Expenditure (2007)10Fiscal Deficit and Fiscal SurplusDefinition:Fiscal deficit: revenue spendingApproaches of Fiscal Policies:Balancing approach: Government should not balance spending against revenue. Discretionary approach: Government should decide spen

6、ding on the basis of need, not balancing.11Fiscal PoliciesAutomatic adjustment:Tax change; government spending; prices of agricultural products.Initiative adjustment:Expansionary policies: Tax cut, government spending expansionsContractionary fiscal policies: Tax rate raise, government spending redu

7、ctionCompensatory fiscal policy: a combined use of the two types of policies.12Potential Problems of Discretionary Fiscal PoliciesTime elapse. Uncertainty.Uncertainty in the size of the multipliers.Uncertainty in the time of policy functioning.Uncertainty of the economic environment.13The Meaning Of

8、 Money Money is the set of assets in an economy that people regularly use to buy goods and services from other people. Money vs Currency Money vs Wealth Money vs Income14The Functions of Money Money has three functions in the economy: Medium of exchange Standard of value Store of value15The Function

9、s Of Money: Medium Of Exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. anything that is readily acceptable as payment.16The Functions of Money Standard of value A Standard of value is the yardstick people use to post prices and recor

10、d debts. Store of Value A store of value is an item that people can use to transfer purchasing power from the present to the future.17The Functions of Money Liquidity Liquidity is the ease with which an asset can be converted into the economys medium of exchange.18The Kinds of Money Commodity money

11、takes the form of a commodity with intrinsic value. Examples: Gold, silver, cigarettes. Fiat money is used as money because of government decree. It does not have intrinsic value. Examples: Coins, currency, check deposits.19Money in the Canadian Economy The quantity of money circulating in the econo

12、my is called the money stock Currency is the paper bills and coins in the hands of the public. Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.20The Simple Case of 100-Percent-Reserve Banking Deposits that banks have received but have not loaned

13、out are called reserves If all deposits are held as reserves, this would be called 100-percent-reserve banking The financial position of the bank can be expressed with a T-account21Money Creation with Fractional-Reserve Banking Reserves are deposits that banks have received but have not loaned out.

14、In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest. The fraction of total deposits the bank holds as reserves is called the reserve ratio.22Money Creation with Fractional-Reserve Banking When a bank makes a loan from its reserves, t

15、he money supply increases. The money supply is affected by the amount deposited in banks and the amount that banks loan. 23Money Creation with Fractional-Reserve Banking Deposits into a bank are recorded as both assets and liabilities. The fraction of total deposits that a bank has to keep as reserv

16、es is called the reserve ratio. Loans become an asset to the bank.24Money Creation with Fractional-Reserve Banking This T-Account shows a bank that accepts deposits, keeps a portion as reserves, and lends out the rest. It assumes a reserve ratio of 10%.AssetsLiabilitiesFirst National BankReserves$10

17、.00Loans$90.00Deposits$100.00Total Assets$100.00Total Liabilities$100.0025Money Creation with Fractional-Reserve Banking When one bank loans money, that money is generally deposited into another bank. This creates more deposits and more reserves to be lent out. When a bank makes a loan from its rese

18、rves, the money supply increases. 26The Money Multiplier How much money is eventually created in this economy? The money multiplier is the amount of money the banking system generates with each dollar of reserves. 27The Money MultiplierAssetsLiabilitiesFirst National BankReserves$10.00Loans$90.00Dep

19、osits$100.00Total Assets$100.00Total Liabilities$100.00AssetsLiabilitiesReservesLoansDepositsTotal AssetsTotal LiabilitiesMoney Supply = $190.00!28The Money MultiplierAssetsLiabilitiesSecond National BankReserves$9.00Loans$81.00Deposits$90.00Total Assets$90.00Total Liabilities$90.00AssetsLiabilities

20、 Third National BankReservesLoansDepositsTotal AssetsTotal LiabilitiesMoney Supply = $271.00!29The Money Multiplier How much money will eventually be created in the economy? 30The Money Multiplier The money multiplier is the reciprocal of the reserve ratio:Money multiplier = 1/R With a reserve requi

21、rement, R = 10% or 1/10, The money multiplier is 10. The higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier31The Federal Reserve System Federal Reserve Banks The core of the Federal Reserve System consists of 12 Federal Reserve banks, located in t

22、he various regions of the country. Each of these banks acts as a central banker for the private banks in its region. 32The Federal Reserve System Functions: Clearing checks between private banks. Holding bank reserves. Providing currency. Providing loans. The Board of Governors The Fed Chairman 33Mo

23、netary Tools Reserve requirements By changing the reserve requirement, the Fed can directly alter the lending capacity of the banking system. A change in the reserve requirement causes: A change in excess reserves. A change in the money multiplier. 34Monetary Tools The Discount Rate This is the inte

24、rest rate the Fed charges for lending reserves to private banks. There are three possible sources of last-minute reserves. Turn to other banks for help. The sale of securities. Borrow reserves from the Federal Reserve System. (Discounting)35Monetary Tools Open-Market Operations Open-Market Operation

25、s are the principal mechanism for directly alter the reserves of the banking system. Buying Bonds P r i Ms Selling Bonds P r i Ms36Monetary Policy Guidelines 37Monetary PolicyMonetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the sup

26、ply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.38How Does the Central Bank Control the Supply of Money?Controlling interest ratesMaking open market transactionsChan

27、ging legal reserve rates39How Does Monetary Policy Change the EconomyMoney supply - interest rate - investment - national income.40Exercises1.Which of the following could cause a recession? AA. A decline in aggregate demandB. A decline in unemploymentC. An increase in aggregate supplyD. An increase in government spending412.When calculating aggregate demand, government expenditure: DA. Includes income transfersB. Includes expenditures by the federal government but not state and local governmentC. Repre