Summary: fiscal policy v monetary policy

Let's now see an example of expansive monetary policy:

An increase in the monetary base will determine an increase in the monetary offer, which will cause a decrease in interest rates in the money market.

The LM curve will move down: for a determined level of balanced income, the interest rates will be less.

The point at which the IS-LM curve crosses will move towards the right: smaller interest rates and greater income (the decrease in the interest rates will cause an increase in investment).

Given the actual level of prices (Po), the balanced income will be greater, which will cause the aggregate demand curve to move to the right.

This policy could be appropriate when the governement wants to revitalise a stagnant economy.

Therefore, to summarize:

If the economy is increasing at an excessively high rhythm, and there is the risk that inflation will rocket, the Government will adopt restrictive fistal or monetary policies:

Increase taxes

Reduce of public expenditure

Reduce the monetary base

If the economy is stagnant, the Government will try to relaunch it with expansive fiscal and monetary policies:

Decrease taxes

Increase public expenditure

Increase the monetary base

Well, guys, this is turning out to be a lot of fun.....

 

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