A Presentation on

Fiscal and Monetary Policies in line with Macroeconomic and Microeconomic

theories

PREPARED BY:

Angshu Gurung (NPI000012)

MBA
Managerial Economics
MB033-3-M
Submitted to
Asia Pacific University
Technology Park, Malaysia
Fiscal and
Monetary Policies
in line with
Macroeconomic
and Microeconomic
theories
Presented by:
Angshu Gurung
NPI000012
 MICROECONOMICS AND
MACROECONOMICS
• Microeconomics focuses on the actions of individual agents within the
economy, like households, workers, and businesses.
• Macroeconomics looks at the economy as a whole. It focuses on broad issues
such as growth of production, the number of unemployed people, the
inflationary increase in prices, government deficits, and levels of exports and
imports.
 What is FISCAL POLICY?
• Fiscal policy refers to the government’s decisions about
taxation and spending in order to influence aggregate demand
(AD) and the level of economic activity.
• Government efforts to promote full employment and maintain
prices by changing government spending and/or taxes
 What is MONETARY POLICY?
• Monetary policy refers to central bank activities that are directed toward
influencing the quantity of money and credit in an economy
• The target of Monetary policy is to achieve low inflation (and usually promote
economic growth).
• This is done through:
• Open market operations
• Reserve ratio
• Discount rate
 EXPANIONARY POLICY
(Easy Money Policy)
Used to counteract a recession

Expansionary Fiscal Policy: Expansionary Monetary Policy:

• Cut taxes • Buy bonds
• Raise spending • Decrease reserve ratio
• Decrease discount rate
 CONTRACTIONARY POLICY
(Tight Money Policy)
Used to fight inflation

Contractionary Fiscal Policy: Contractionary Monetary Policy

• Raise taxes • Sell bonds
• Lower government spending • Increase reserve ratio
• Increase discount rate
 Using Fiscal Policy to Affect Aggregate Demand

Using fiscal policy to increase AD will have 2 effects:

• Multiplier effect

• Crowding-out effect
 Multiplier Effect

When the government spends more &

taxes less, people & businesses have
more money, so they spend more too.

So, AD increases by more than just

what the government spends.
 Crowding-Out Effect

• Counter-force to multiplier effect

• Increased spending by the government will cause at least some
decrease in AD

When government spends money, they increase interest rate in loanable

funds graph. This increase in interest rates causes a DECREASE in
investment spending
 Using Monetary Policy to Affect Aggregate Demand

Theory of Liquidity Preference

• When the money supply increases, interest rates decrease (money market
graph)
• When money supply increases, people have lots of money to deposit, so banks
decrease interest rates to bring supply & demand in money market into balance

This causes higher investment spending which causes AD to increase, leading to

higher prices & higher output.
So, the central bank can increase/decrease money supply to affect price levels and
output
 Macroeconomic use of Fiscal and Monetary Policies

The overarching goal of both monetary and fiscal policy is normally the creation
of an economic environment where growth is stable and positive and inflation is
stable and low.

Crucially, the aim is therefore to steer the underlying economy so that it does not
experience economic booms that may be followed by extended periods of low or
negative growth and high levels of unemployment.
 Microeconomic use of Fiscal and Monetary Policies

Being macroeconomic, Fiscal and monetary policies help create stable economic
environment for individual microeconomic actors.

In such a stable economic environment, householders can feel secure in their

consumption and saving decisions, while corporations can concentrate on their
investment decisions, on making their regular coupon payments to their bond holders
and on making profits for their shareholders.
Thank You!