Economics Department
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 durable . The consumption
the function is
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The Supply of
money:
The money supply that will
focus on has a
narrow definition called M1 and
alternative board definition called M2. The narrow
definition M1 consists of currency paper money and coins hands of the non-bank public, plus checkable deposits in
commercial banks and other depository institutions such
as saving and
loan associations. The broader definition adds
money market funds, saving deposits
and small- denomination time deposits to
M1.
The narrow
set of liquid asset
in M1 has two
characteristics that separate them
from other assets
in the economy: they are
the generate accepted means of
payment, and they earn
little or no
interest . The growth of
money market funds has blurred
the distinction between M1 and
M2.
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