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ECN 200: Introduction to Economics Nusrat Jahan Lecture-10

ECN 200: Introduction to Economics Nusrat Jahan Lecture-10. Fiscal Policy and Monetary Policy . Sources of Economic Fluctuations. Aggregate Demand. Aggregate demand curve relates price level to product output purchase quantity level. It is a downward-sloping curve.

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ECN 200: Introduction to Economics Nusrat Jahan Lecture-10

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  1. ECN 200: Introduction to Economics NusratJahan Lecture-10 Fiscal Policy and Monetary Policy

  2. Sources of Economic Fluctuations • Aggregate Demand • Aggregate demand curve relates price level to product output purchase quantity level. It is a downward-sloping curve. • Determinants of Aggregate demand • - Consumer spending • - Investment • - Government purchases • - Net export Price Level AD GDP • Aggregate Supply • The aggregate supply curve, which relates price level to businesses' real product output production levels. • Determinants of aggregate supply • - Change in input prices • - Change in productivity • - Change in legal-institutional environment Price Level AS GDP

  3. Price Level Price Level AS AS P P’ P’ P AD AD’ AD’ AD Y’ Y GDP Y Y’ GDP Recession Demand-pull Inflation

  4. Ways to control economic fluctuation 1. Fiscal Policy Fiscal Policy consists of deliberate changes in government spending and tax collections designed to achieve full-employment, control inflation and encourage economic growth.

  5. Expansionary fiscal policy: When recession occurs expansionary fiscal policy can be implemented to prevent economic downfall. • During recession investment↓ as a result AD curve shifts to the left. • Expansionary fiscal policy can be taken 3 ways- •  Increased Government Spending •  Tax reduction •  Combined Government spending increases and tax reductions

  6. Contractionary fiscal policy: When demand-pull inflation occurs, a restrictive or contractionary fiscal policy can be implemented to control it. • When demand-pull inflation occurs, the demand for goods & services ↑ as a result investment↑ which shifts the AD curve rightwards. • Contractionary fiscal policy can be taken in 3 ways- •  Decreased government spending •  Increased taxes •  Combined government spending decreases and tax increases

  7. 2. Monetary Policy • It consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy to achieve and maintain price-level stability, full employment and economics growth. • Expansionary Monetary Policy: • - It is exercised during recession. • - Interest rate is lowered to bolster borrowing and spending. • - Greater spending will create greater aggregate demand and increase real output. • ContractionaryMonetary Policy: • - Interest rate in increased in order to reduce borrowing and spending. • - Lower spending curtails aggregate demand and hold down price-level increases.

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