1、Unit 10Text:Fiscal and Monetary Policy（财政政策与货币政策）1.Key words2.Stabilization policy3.Fiscal policy4.Monetary policy5.Questionsinsufficient demandplanned spendingstabilization policyexpansionary policypotential outputexpansionary gapcontractionary policyfiscal policymonetary policygovernment purchases
2、full employmentmilitary spendingtransfer paymentsdisposable incometax cutcapital formationbudget deficittax collectionscapital goodslegislative processnational defenseautomatic stabilizertaxable incomeThe Great Depressiongovernment securitiesopen-market operationsgovernment bondscommercial banksfina
3、ncial institutiondiscount windowday-to-day fluctuationdiscount ratelegal reserve requirements2.1 Definition of stabilization policy2.2 Expansionary and contractionary policyPolicies that are used to affect planned aggregate expenditure,with the objective of eliminating output gaps,are called stabili
4、zation policies.The two major tools of stabilization policy are fiscal policy and monetary policy.Policy actions intended to increase planned spending and output are called expansionary policies;expansionary policy actions are normally taken when the economy is in recession.Contractionary policies a
5、re policy actions intended to reduce planned spending and output.3.1 Definition of fiscal policy3.2 Composition of fiscal policy3.3 Fiscal policy as a stabilization tool:Three qualifications3.4 Reasons for fiscal policy as a stabilizing forceFiscal policy refers to decisions about the governments bu
6、dgethow much the government spends and how much tax revenue it collects.3.2.1 Government purchases and planned spending3.2.2 Taxes,transfers,and aggregate spendingGovernment purchases of goods and services,being a component of planned aggregate expenditure,directly affect total spending.If output ga
7、ps are caused by too much or too little total spending,then the government can help to guide the economy toward full employment by changing its own level of spending.Transfer payments are payments made by the government to the public,for which no current goods or services are received.Examples of tr
8、ansfer payments are unemployment insurance benefits,Social Security benefits,and income support payments to farmers.Changes in the level of taxes or transfers can be used to affect planned aggregate expenditure and thus eliminate output gaps.3.3.1 Fiscal policy and the supply side3.3.2 The problem o
9、f deficits3.3.3 The relative inflexibility of fiscal policyFiscal policy affects both planned spending and potential output.Thus,in making fiscal policy,government officials should take into account not only the need to stabilize planned aggregate expenditure but also the likely effects of governmen
10、t spending,taxes,and transfers on the economys productive capacity.The governments budget deficit is the excess of government spending over tax collections.Sustained government deficits can be harmful because they reduce national saving,which in turn reduces investment in new capital goodsan importa
11、nt source of longrun economic growth.In reality,changes in government spending or taxes must usually go through a lengthy legislative process,which reduces the ability of fiscal policy to respond in a timely way to economic conditions.Another factor that limits the flexibility of fiscal policy is th
12、at fiscal policymakers have many other objectives besides stabilizing aggregate spending,from ensuring an adequate national defense to providing income support to the poor.The first is the presence of automatic stabilizers,provisions in the law that imply automatic increases in government spending o
13、r decreases in taxes when real output declines.Taxes and transfer payments also respond automatically to output gaps.These automatic changes in government spending and tax collections help to increase planned spending during recessions and reduce it during expansions,without the delays inherent in t
14、he legislative process.Although fiscal policy may be difficult to change quickly,it may still be useful for dealing with prolonged episodes of recession.4.1 Definition of monetary policy4.2 Composition of monetary policyMonetary policy refers to decisions about the size of the money supply.4.2.1 Ope
15、n-market operations4.2.2 Discount-rate policy4.2.3 Changing reserve requirementsBy selling or buying government securities in the open market,the central bank can lower or raise bank reserves.These so-called open-market operations are a central banks most important stabilizing instrument.The bonds s
16、old to the open market.This includes dealers in government bonds,who then resell them to commercial banks,big corporations,other financial institutions,and individuals.When commercial banks are short of reserves,they are allowed to borrow from the central bank.These loans are called borrowed reserve
17、s.When borrowed reserves are growing,the banks are borrowing from the central bank,thereby increasing total bank reserves(borrowed plus unborrowed reserves).Conversely,a drop in borrowed reserves promotes a contraction in total bank reserves.Sometimes,the central bank may raise or lower the discount
18、 rate,which is the interest rate charged on bank borrowings from the central bank.For many years,the discount rate was the bellwether of monetary policy.Reserve requirements help the central bank conduct its open-market operations by ensuring a stable demand for reserves.By setting reserve requireme
19、nts above the level that banks desire,the central bank can determine the level of reserves and can thereby control the money supply more precisely.The net effect is an increase in the Federal Reserves control over short-term interest rates.(1)Explain how the fiscal policy fights the recession or inf
20、lation.(2)What is the definition of legal reserve ratio?How do you think about its roles in the stability of one economy?(3)The central bank has decided that unemployment is rising too sharply and wants to reverse this trend by expanding the money supply.What steps must the central bank take to expand money to stimulate the economy?
