1.1. Fiscal policy
Fiscal policy is the government's decisions about spending
and taxes in order to guide the economy in output and employment levels
desired.
Basic Composition of aggregate demand: AD = C + I + G
If procurement of goods and services by the government (G) increase
or decrease aggregate demand will directly increase or decrease according to AD.
increased net tax decrease earnings, thereby
reducing private consumption (C), thereby affecting aggregate demand.
1.3. Monetary policy
Monetary policy is the policy tools used by
credit operations and foreign exchange to stabilize the currency, thereby stabilize
the economy and promote growth and development.
The objective of the monetary policy is price stability, increase
GNP growth, reduce unemployment.
tools of monetary policy: the compulsory reserve ratios,
open market operations and lending rates rediscount.
the main tools this policy will impact on the money supply and interest
rate, and interest rates due to the impact of investments that impact
on aggregate demand, thereby putting the economy in equilibrium.
If the government wants to increase aggregate demand, but do not want to work
through channels active fiscal policy, the key can use
expansionary monetary policy to reduce interest rates, stimulate investment and
thereby increasing aggregate demand.
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