Monetary and Fiscal policy in the Extended Model
Monetary
and Fiscal policy in the Extended Model
Monetary
Policy:
Monitory policy is the
macroeconomic policy laid down by the central bank. If involves management of
money supply ad interest rate and is
the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation,
consumption growth and liquidity.
Fiscal
Policy:
Fiscal policy refers to the use of government spending and
tax policies to influence
macroeconomic conditions, including
aggregate demand , employment,
inflation and economic growth.
The
Static Model Extended:
The consumption
function of part II must
be extended at
least expenditures will
assets a (=A/p). The
consumer expenditure will probity react quickly
to a change in
disposal income that
seems permanent to consumers
as opposed to
the effect of a temporary
tax rate change . The
increase in consumer expenditure might expect the increase
in consumer expenditure might
the increase disposal income , at
least in the short run
since the increase in desired
consumption that follows the
increase in purchases of reflect
a disproportionate increase in
purchases of consumer durables . The consumption
the function is
c= c(y-+ (y),a) I 
, 
> 0 ….(1)
, > 0 ….(1)
where
real consumer net
worth a = A/p
The second modification of the components of
the IS product market equilibrium
condition, where investment
should be a function of
the level of noticed that in a
model of static equilibrium, replacement investment should depend on the level of output. Net investment due to
changes in investment rate of
output, does not appear in
the static model bt it
is an important factor in determining the path of the
economy between equilibrium.
Thus in the static model we have a function for replacement
investment given the equilibrium level
of capital stock;
I = I (r, y); 
<0, 
>0
<0, >0
The
IS curve: These modifications
of the consumption and investment
function gives us a
revised from of the product market equilibrium
condition:-
Y =
c (y –f(y), a) + I (r, y) + g
Or, S (y- t (y), a _ t (y)=)= I r, y)
+g
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