Fiscal/Monetary Policy - Demand side instruments? (1 Viewer)

[P_Dilemma]

There's this dot-point in this essay i'm supposed to do:

"Explain why monetary and fiscal policy are regarded as demand-side instruments"

which is crazy, because the way i see it they are supply-side instruments if anything. Monetary policy influences the supply of funds available for usage, thus changing the price of borrowing (ie. the interest rates).

Fiscal policy works by getting tax revenue and reallocating those funds to areas where the market fails to deliver (eg. social security). Again, supply of funds is what matters here.

So... WHY, HOW, are they classified as demand-side instruments? Or is it a typo? maybe i'll give my teacher a call...

 

[Riviet]

The "demand" referred to in the dotpoint is "aggregate demand" which is basically the demand for goods and services from consumers and general spending/consumption as well as borrowing by businesses and firms. By influencing the level of interest rates, the level of aggregate demand will change accordingly. A higher level of aggregate demand from lower interest rates will lead to higher output and employment [following an event like recession].

For fiscal policy, aggregate demand is influenced by how much the government plans to spend and what it spends its revenue on. By decreasing the revenue that it receives, there is a multiplied increase in consumption and investment in the economy, which stimulates aggregate demand.

Note that higher interest rates or an increase in government revenue should lower aggregate demand.

 

[Loz_metalhead]

AD is the total level of expenditure in an economy over a given period of time

AS is the total level of income in an economy over a given period of time.

Basically both macroeconomic policies influence expenditure in the economy-increase interest rates, reduce govt expenditure and increase tax will decrease AD.

I havent studied the microeconomic policies chapter yet

 

[P_Dilemma]

The "demand" referred to in the dotpoint is "aggregate demand" ... By influencing the level of interest rates, the level of aggregate demand will change accordingly. A higher level of aggregate demand from lower interest rates will lead to higher output and employment [following an event like recession].

Yes, but am i wrong in saying that the RBA FIRST influences the supply of funds available for loan throu market operations? Aggregate (Real) Supply?

For fiscal policy, aggregate demand is influenced by how much the government plans to spend and what it spends its revenue on.

So taxation isn't as big an issue?

By decreasing the revenue that it receives, there is a multiplied increase in consumption and investment in the economy, which stimulates aggregate demand.

Decreasing revenue by decreasing taxation, right? But aren't taxes supposed to be efficient (ie, does not affect the economic decisions of others significantly)? If there is a multiplied increase in consumption" due to tax cuts, sure;y that cannot be regarded as efficient?

And again, isn't the government FIRST influencing the level of funds in the economy through taxation and expenditure? And that demand from the consumers comes after?

Cause and effect... the cause (supply) came first, right? Please clarify this issue a bit more...

-P_D

 

[Riviet]

Yes, but am i wrong in saying that the RBA FIRST influences the supply of funds available for loan throu market operations? Aggregate (Real) Supply?

Yes, the RBA does influence the supply of funds, but this is not aggregate supply. Aggregate supply is the total supply of goods and services in an economy during a period of time.

So taxation isn't as big an issue?

Taxation is not the only component of fiscal policy, the government changes its spending on other aspects as well like social welfare and health.

And again, isn't the government FIRST influencing the level of funds in the economy through taxation and expenditure? And that demand from the consumers comes after?

Yes.
I think you were just confusing yourself with aggregate supply and the supply of funds that affect the cash rate. Hope that helps.

 

[P_Dilemma]

Yes, the RBA does influence the supply of funds, but this is not aggregate supply. Aggregate supply is the total supply of goods and services in an economy during a period of time.

Oh, y'mean the RBA takes funds out of the financial sector (so less people can borrow), but it's still technically within the Australian economy?

I think you were just confusing yourself with aggregate supply and the supply of funds that affect the cash rate.

Ok, let me just get this straight - Aggregate supply (of funds) is the supply of funds within the Australian economy, be it in government, households, or the financial sector, at any given time, which exludes ay funds that may be from overseas (because it's not in the Austrlian economy.

The RBA can change interst rates because they influence the supply of funds, not in the entire Australian economy, but in the financial sector only, right?

I hope i'm going the right direction...

-P_D

 

[Riviet]

Oh, y'mean the RBA takes funds out of the financial sector (so less people can borrow), but it's still technically within the Australian economy?

Well the RBA creates a shortage or a surplus of funds in the short term money market by purchasing or selling government securities. By selling these securities, the RBA receives the funds from the money market for selling them, hence there are less funds, ie a shortage of funds. This should lead to upward pressure on the cash. Remember that this is all happening within the Australian economy.

Ok, let me just get this straight - Aggregate supply (of funds) is the supply of funds within the Australian economy, be it in government, households, or the financial sector, at any given time, which exludes ay funds that may be from overseas (because it's not in the Austrlian economy.
The RBA can change interst rates because they influence the supply of funds, not in the entire Australian economy, but in the financial sector only, right?

Yep you got the idea.

 

[Conspirocy]

Okay basically you are getting mixed up with the term supply.

Aggregate Supply is the relationship between the quantity of real GDP supplied and the price level when all prices and wages have adjusted so there is full employment. (textbook def, sorry if it’s a bit advanced) okay so this has nothing to do with the supply of money in the economy DIRECTLY.

Now, Aggregate supply will change when
- labour becomes more productive
- there is an increase in capital
- there are improvements in technology

So based on that The money supply and interest rates do not directly influence AS, unless you want to say they make capital more attractive, or they make price of labour more attractive. Let me correct myself here, basically movements in AS are caused by microeconomic policies, which can be implemented in the budget through spending in certain areas, however unless it is a microeconomic policy the only result would be a different point on the same AS curve, and you would not reach a different curve. (this is confusing if u don’t get it ask)

In your mind you need to separate the process of how monetary and fiscal policy work (which is what you are describing) from – from the AD – AS model.

Then just apply how fiscal and monetary policy influence AD like everyone else said and you will be sweet.

 

[P_Dilemma]

cry, cry, cry... i'm so confused

Aggregate Supply is the relationship between the quantity of real GDP supplied and the price level when all prices and wages have adjusted so there is full employment. (textbook def, sorry if it’s a bit advanced) okay so this has nothing to do with the supply of money in the economy DIRECTLY.

That's what i was getting at, that the supply of funds within the australian economy isn't changed.

Now, Aggregate supply will change when
- labour becomes more productive
- there is an increase in capital
- there are improvements in technology

So based on that The money supply and interest rates do not directly influence AS, unless you want to say they make capital more attractive, or they make price of labour more attractive. Let me correct myself here, basically movements in AS are caused by microeconomic policies, which can be implemented in the budget through spending in certain areas, however unless it is a microeconomic policy the only result would be a different point on the same AS curve, and you would not reach a different curve. (this is confusing if u don’t get it ask)

...wait...

microeconomic policy or not, weren't those funds used by government still within the Australian economy in the first place, through taxation revenue? How is the AS curve shifting?

Well the RBA creates a shortage or a surplus of funds in the short term money market by purchasing or selling government securities. By selling these securities, the RBA receives the funds from the money market for selling them, hence there are less funds, ie a shortage of funds. This should lead to upward pressure on the cash. Remember that this is all happening within the Australian economy.

...umm, i was under the impression that was all happening in the financial sector (within the australian economy).

Ok, more correction (and correct me if i'm wrong): If those funds aren't in use, they're not part of the AS curve. Eg, when the gov't taxes us and keeps the recenue on hold, those funds aren't part of AS. Likewise, when the RBA sells gov't securities, they keep those funds locked up, unused, and thus they are not part of AS.

...wait...

Oh crap, we're going in circles... HOW CAN YOU STILL CALL THEM DEMAND-SIDE INSTRUMENTS!!! I think it's pretty clear that in both monetary and fiscal policy they're influencing aggregate supply first!

 

[Conspirocy]

I really would not recomend you taking the view that they influence aggregate supply.

- first of all Aggregate supply does not include the supply of funds in the economy

GDP does not measure the ammount of money in the economy, im sure u can look up what GDP is a meausre of because i cant remember of the top of my head

- second, you cannot just assume there is a link between government revenues such as taxation, and these revenues as a source of spending. There are many different way to finance a goverment budget.

a shift in the AS curve would be a movement to the left for an increase in AS and a movement to the for a decrease in AS

again why do you think the source of the funds is important??? i think this is the main error in ur thought process

- AGAIN the funds are not part of the AS curve because GDP does not measure the supply of money in the economy, there are three measures for the supply of money in the economy
that you probably learnt in year 11
- M3 (RBA definition)
- Broad money
- money base
- Credit

so i really dont see how u are linking the money supply with Aggregate supply

monetary and fiscal policy are demand side instruments that influence AD

 

[P_Dilemma]

I think it's a "cause and effect" confusion...

-Because the effect of monetary policy is that it influences demand and;
-because the effect of fiscal policy influences demand

they are both considered demand-side instruments. It's not what they influence directly that matters, it's the effect...

...right?

-P_D

 

[Demandred]

It's the effect

Monetary Policy:

Interest rates go down, money supply increase, business investment goes up, AD = C+G+I, since I goes up, AD goes up. More common sense approach would be that sense people borrow a lot, lower interest = more money to spend, therefore they demand more goods.

Fiscal Policy:

Increase spending and lower taxes directly influences consumption, therefore people have more money to spend, which means more demand for goods.

 

[iain_12345]

So... WHY, HOW, are they classified as demand-side instruments? Or is it a typo? maybe i'll give my teacher a call...[/QUOTE]


...

I hate people who pick economics because it "interests" them if you r crap at it dont pick it, coz ul just drag my marks down.

Besides...

Don't u own a txt book - leading edge is the most basic and it has all u need to know.

Fiscal - used to promote increases in AD
Monetary - used to discourage increases in AD

very simple.

 

[iain_12345]

You aren't born good at economics, you learn to be good at it. And the best way to be good at it is to be interested in the subject and wanting to learn more about it. There is nothing wrong with people who pick economics because it "interests them", they should be commended for choosing a subject they are interested in rather than one just because it scales well.

You did the hsc in 2004... why are you still blogging on this site... dont u have a life. And i dont care if people like economics in the hsc its all about getting higher marks and people like this drag my marks down.

Due to the heavy content involved in economics of you dont have a good memory or your teacher is not Mr Moore who taught Tim Dixon (author of leading edge) and got him his place at the top of the state... then i would highly recommend you DONT pick this subject. Ah woteva i dun care its not like IL care about wot u do after iv DONE the hsc... cough*withoutwings*cough.

 

[Demandred]

I hate people who pick economics because it "interests" them if you r crap at it dont pick it, coz ul just drag my marks down.

Besides...

Don't u own a txt book - leading edge is the most basic and it has all u need to know.

Fiscal - used to promote increases in AD
Monetary - used to discourage increases in AD

very simple.

Hey iain_12345, do you know why the IS curve is upward sloping, or the LM curve is downward slopping, to which the BP should intersect @ equilibrium?

Don't you own a university level textbook ?? Pearsons Economic Publications is the most basic and it has all you need to know.

I hate it was when wise cracks like you have nothing good to contribute. Oh btw, how much utility you get for being an arsehole?

Everyone should give kudos to WW, she has done a great job helping others.

 

[iain_12345]

Hey iain_12345, do you know why the IS curve is upward sloping, or the LM curve is downward slopping, to which the BP should intersect @ equilibrium?

Don't you own a university level textbook ?? Pearsons Economic Publications is the most basic and it has all you need to know.

I hate it was when wise cracks like you have nothing good to contribute. Oh btw, how much utility you get for being an arsehole?

Everyone should give kudos to WW, she has done a great job helping others.

WOOOOOOOAAAAAAAAAAA shit thats hilarious, who tha hell r you? hahahaha. Mate im not in university u waynek why wud i know that hahaha and if ur reverting to hsc students to solve ur problems maybe u shud make sum friends at university and try and learn the basics from ur pearsons publications.

re the utility questions i will quote mick jagger "I cant get nooooo dunanaaa [utility]"


"I hate it was [ummmm that doesnt make sense uni boy 'was' isnt necessary] when wise cracks like you have nothing good to contribute." You just come on thinking ur a wise guy coz you go to uni, and are just probably tryin to stick up for ur 2004 hsc buddy, maybe ur hoping that she'll think ur her knight in shining armour and u might get a date out of it... or maybe ul be satisfied with just a friend. And besides didnt u see i did contribute b4... its just WW decided she wanted to take the approach she did and get all up in ma koolaid.
& if your just a lost uni studnet anD really wanted to know what you asked then il tell you coz see my other economics teacher has a master in economics so we get taught the real deal. And besides YOUR WRONG let me explain what really happens with the IS & LM CURVES. So, points on the IS curve show combinations of the rate of interest & the level of national income at which the market for goods & services is in equilibrium RIGHT. SO then at each point investment demand (I) will equal savings (S) (or injections equal withdrawals in a governed open economy such as Australia). Higher rates of interest rates will reduce investment demand & may also reduce consumption demand. This will tend to reduce the equilibrium level of national income. Consequently the IS curve will slope DOWNWARDS NOT UPWARDS from left to right Ok!. & concerning the LM curve we see that points on the LM curve show combinations of the interest rates & national income at which the money market is in equilibrium. At each point the demand for liquidity (L) equals the supply of money (M). Higher national income raises the transactions & precautionary demand for money. This will tend to increase the equilibrium rate of interest. Consequently the LM curve slopes upward from left to right.

I know.... gud eh!


Oh and my information is from Pearsons but not the basic edition lol try Macroeconomics, 4th Edition, by Olivier Blanchard


NOW THATS A CONTRIBUTION.

 

[P_Dilemma]

I hate people who pick economics because it "interests" them if you r crap at it dont pick it, coz ul just drag my marks down.

Besides...

Don't u own a txt book - leading edge is the most basic and it has all u need to know.

How the hell will i drag your marks down? We don't even go to the same school.

If you were so worried about being dragged down by other people you shouldn't have done it. Actually, you shouldn't have done the HSC at all. Every subject will have someone who is crap at it. And YOU can't honestly say that you aren't crap yourself.

And hey, i'm asking questions, getting clarification. In other words, trying to get my marks up. There's nothing wrong with that.

-P_D

 

[Demandred]

WOOOOOOOAAAAAAAAAAA shit thats hilarious, who tha hell r you? hahahaha. Mate im not in university u waynek why wud i know that hahaha and if ur reverting to hsc students to solve ur problems maybe u shud make sum friends at university and try and learn the basics from ur pearsons publications.

re the utility questions i will quote mick jagger "I cant get nooooo dunanaaa [utility]"


"I hate it was [ummmm that doesnt make sense uni boy 'was' isnt necessary] when wise cracks like you have nothing good to contribute." You just come on thinking ur a wise guy coz you go to uni, and are just probably tryin to stick up for ur 2004 hsc buddy, maybe ur hoping that she'll think ur her knight in shining armour and u might get a date out of it... or maybe ul be satisfied with just a friend. And besides didnt u see i did contribute b4... its just WW decided she wanted to take the approach she did and get all up in ma koolaid.
& if your just a lost uni studnet anD really wanted to know what you asked then il tell you coz see my other economics teacher has a master in economics so we get taught the real deal. And besides YOUR WRONG let me explain what really happens with the IS & LM CURVES. So, points on the IS curve show combinations of the rate of interest & the level of national income at which the market for goods & services is in equilibrium RIGHT. SO then at each point investment demand (I) will equal savings (S) (or injections equal withdrawals in a governed open economy such as Australia). Higher rates of interest rates will reduce investment demand & may also reduce consumption demand. This will tend to reduce the equilibrium level of national income. Consequently the IS curve will slope DOWNWARDS NOT UPWARDS from left to right Ok!. & concerning the LM curve we see that points on the LM curve show combinations of the interest rates & national income at which the money market is in equilibrium. At each point the demand for liquidity (L) equals the supply of money (M). Higher national income raises the transactions & precautionary demand for money. This will tend to increase the equilibrium rate of interest. Consequently the LM curve slopes upward from left to right.

I know.... gud eh!


Oh and my information is from Pearsons but not the basic edition lol try Macroeconomics, 4th Edition, by Olivier Blanchard


NOW THATS A CONTRIBUTION.

Hey Fuckwit, have you realised i did that on purpose?

A person comes in this forum, having trouble with some areas of economics, and you put him down...? Wasn't this forum designed to help people?

If you're just going to come onto these forums and put people down, get the fuck out?

 

[loveholic]

i`m not sure if you need help but i`ll try anyway -- good revision

Macroeconomic policies are called 'demand-side' policies as they aim to influence demand. They`re also labelled as 'counter-cyclical' as they aim to reduce the fluctuations in the Business Cycle (and the business cycle shows economic growth in which aggregate demand influences the cycle) but like everybody else said, they`re demand side policies as they INFLUENCE demand through the altering of interest rates and changes in the budget outcome

Microeconomic policies or 'Supply-side' policies aim at influencing the supply of goods and services (not altering supply to change the state of the economy -- like the example you gave about the RBA) and would involve reforms that aim to increase things such as efficiency and productivity, hence increasing the aggregate supply for goods and services

 

[Conspirocy]

let me explain what really happens with the IS & LM CURVES. So, points on the IS curve show combinations of the rate of interest & the level of national income at which the market for goods & services is in equilibrium RIGHT. SO then at each point investment demand (I) will equal savings (S) (or injections equal withdrawals in a governed open economy such as Australia). Higher rates of interest rates will reduce investment demand & may also reduce consumption demand. This will tend to reduce the equilibrium level of national income. Consequently the IS curve will slope DOWNWARDS NOT UPWARDS from left to right Ok!. & concerning the LM curve we see that points on the LM curve show combinations of the interest rates & national income at which the money market is in equilibrium. At each point the demand for liquidity (L) equals the supply of money (M). Higher national income raises the transactions & precautionary demand for money. This will tend to increase the equilibrium rate of interest. Consequently the LM curve slopes upward from left to right.

I know.... gud eh!


Oh and my information is from Pearsons but not the basic edition lol try Macroeconomics, 4th Edition, by Olivier Blanchard


NOW THATS A CONTRIBUTION.

Seriously, good on you for going and taking the initiative to look up a higher level textbook for economics. (I'm not being sarcastic - people who go to that sort of trouble usually come in the top 10 for HSC economics)

Of course, there is always more to know about economics

for example. in an open economy

Y = C + I + G + (X - M)
let
Y=Income
C=consumption, also C is f(YD), and would normally be written something like C=a+MPS(Y-T) YD=Y-T
I=investment, I(r)
G= government spending
NX=net exports = X-M
T=taxation

so now lets re-arrange this

Y - C - G - NX = I + NX

now lets add and subtract T

(Y - C - T) + (T - G) = I + NX

so you understand

private savings is (Y - C - T), and public saving is (T - G)

so national saving S = I + NX

wait didn't you say that saving = investment

oh i guess ur textbook doesnt know everything

wanker

also if you want to be picky, the interest rate is not set in australia, because australia is a small open economy, so interest rate will really be set by the world interest rate in the long run and it will be an exogenous variable. The only endogenous variable that has the power to bring the economy into equilibrium is the real exchange rate...why dont you go look that up

anyway point im making is, people get taught things differently, i.e. ur pearson textbook teaches u that, others teach another interpretation... those interpretations are called models

all u need is an acknowledged textbook in economics written for HSC students to get a band 6, thats all i had.

oh and congrats on ur teacher having a masters. what have u done with ur life...i wouldnt really attack someone doing combined law at uni, or at uni cause they are a step up on the food chain. Your teacher wont sit ur exam for u. punk