Countercyclical Macroeconomic Policies In Economics
These are my notes on Countercyclical Macroeconomic Policies in Economics.
Countercyclical policies attempt to reduce the severity of economic fluctuations and smooth the growth rates of employment, GDP, and prices.
Countercyclical monetary policy reduces economic fluctuations by manipulating bank reserves and interest rates.
Expansionary monetary policy increases bank reserves and decreases interest rates. Contractionary monetary policy decreases bank reserves and increases interest rates.
Countercyclical fiscal policy reduces fluctuations by manipulating government expenditures and taxes.
Expansionary fiscal policy increases government expenditure and decreases taxes. Contractionary monetary policy decreases government expenditures and increases taxes.
Some countercyclical policies are conducted jointly by the monetary authority and the fiscal authority. Such hybrid policies stimulate economic activity by extending credit or other financing to banks and other firms.
Countercyclical policies attempt to reduce the intensity of economic fluctuations and smooth the growth rates of employment, GDP, and prices.
Countercyclical monetary policy, which is conducted by the central bank in the US, attempts to reduce economic fluctuations by manipulating bank reserves and interest rates.
Countercyclical fiscal policy, which is passed by the legislative branch and signed into law by the executive branch, aims to reduce economic fluctuations by manipulating government expenditures and taxes.
Expansionary monetary policy increases the quantity of bank reserves and lowers interest rates.
Quantitative easing is achieved when the central bank creates a large quantity of bank reserves to buy long term bonds, simultaneously increasing the quantity of bank reserves and pushing down the interest rate on long term bonds.
The Federal Reserve acts as a lender of last resort during times of crisis, providing loans to banks and other firms when standard financing channels become unavailable.
Contractionary monetary policy slows down growth in bank reserves, raising interest rates, reduces borrowing, slows down growth in the money supply, and reduces the rate of inflation.
Expansionary fiscal policy uses higher government expenditure and lower taxes to increase the growth rate of real GDP.
Contractionary fiscal policy uses lower government expenditure and higher taxes to reduce the growth rate of real GDP.
Automatic stabilizers are components of the government budget that automatically adjust to smooth out economic fluctuations.
If a 1$ change in government expenditure causes a $m change in GDP, then the government expenditure multiplier is m.
Crowding out occurs when rising government expenditure partially or even fully displaces expenditures by households and firms.
If a 1$ reduction in taxation causes an $m increase in GDP, then the government taxation multiplier is m.
Countercyclical policies attempt to reduce the intensity of economic fluctuations and smoothe the growth rates of employment, GDP, and prices.
Countercyclical monetary policy, which is conducted by the central bank, attempts to reduce economic fluctuations by manipulating bank reserves and interest rates.
Open market operations refer to the Federal Reserve’s transactions with private banks to increase or reduce bank reserves held on deposit at the Federal Reserve. Open market operations and interest on reserves influence the federal funds rate. An increase in the supply of bank reserves lowers the federal funds rate. A decrease in interest on reserves also lowers the federal funds rate.
Expansionary monetary policy increases the quantity of bank reserves and lowers interest rates, shifting the labor demand curve to the right and increasing the growth rate of GDP.
Contractionary monetary policy slows down the growth in bank reserves and increases interest rates, shifting the labor demand curve to the left and reducing the growth rate of GDP. Contractionary monetary policy is used when inflation is well above the Federal Reserve’s long run target of 2 percent or when the economy is growing excessively quickly.
Countercyclical fiscal policy, which is passed by the legislative branch and signed into law by the executive branch, reduces economic fluctuations by manipulating government expenditures and taxes.
Countercyclical fiscal policies might be automatic or discretionary. Automatic stabilizers are components of the government budget, like taxes owed, that automatically adjust to smooth out economic fluctuations.
Expansionary fiscal policy uses higher government spending and lower taxes to increase GDP, shifting the labor demand curve to the right. Crowding out occurs when rising government expenditure partially or even fully displaces expenditures by households and firms.
Countercyclical fiscal policy uses lower government spending and higher taxes to reduce GDP, shifting the labor demand curve to the left.