Two fields of policy have a strong impact on a national economy and its development. The first of the two policies that are designed to supplement each other, falls into governments responsibility, more exactly it is formulated by the minister of finance. This one is fiscal policy. The second one, monetary policy, is designed by the national bank. For making clear the difference between both I would like to explain both policies as an introduction to the topic of this paper.
“The government’s choice of tax and spending programs, which influences the amount and maturity of government debt as well as the level, composition, and distribution of national output and income. Many summary indicators of fiscal policy exist. Some, such as the budget surplus or deficit, are narrowly budgetary. Others attempt to reflect aspects of how fiscal policy affects the economy. For example, a decrease in the standarized-budget surplus (or increase in the standarized-budget deficit) measures the short-term stimulus of demand that results from higher spending or lower taxes. The fiscal gap measures whether current fiscal policy implies a budget that is close enough to balance to be sustainable over the long term. The fiscal gap represents the amount by which taxes would have to be raised, or spending cut, to keep the ratio of debt to GDP from rising forever. Other important measures of fiscal policy include the ratios of total taxes and total spending to GDP.” In the way of deciding about the amount of expenditures and premises for spending, fiscal policy is an important tool for government for setting macroeconomic conditions.
Table of Contents
- I. POLICIES THAT INFLUENCE ECONOMIC DEVELOPMENT AND WELFARE
- 1. Fiscal Policy
- 2. Monetary Policy
- II. MONETARY POLICY
- 1. Objectives
- a. The "magic triangle"
- b. Full employment
- c. Equity
- d. Growth
- e. Balance of exchange rates
- f. Price stability
- 2. Tools
- 1. Objectives
- III. LIMITATION OF MONETARY POLICY
- IV. BIBLIOGRAPHY
- V. APPENDIX: Welfare and welfare change
Objectives and Key Themes
This essay aims to explore the objectives of monetary policy and their relationship to economic development. It examines the tools used to achieve these objectives and considers the limitations of monetary policy.
- The impact of fiscal and monetary policies on economic development.
- The objectives of monetary policy, including the "magic triangle" of price stability, full employment, and foreign trade balance.
- The tools used by national banks to implement monetary policy.
- Limitations inherent in the effective application of monetary policy.
- The interplay between monetary policy and economic welfare.
Chapter Summaries
I. Policies that Influence Economic Development and Welfare: This chapter introduces two key policy areas impacting national economies: fiscal policy, determined by the government's tax and spending choices, and monetary policy, managed by the national bank. It differentiates between these policies, explaining how fiscal policy involves government decisions on expenditures and taxation, impacting macroeconomic conditions. Monetary policy, conversely, focuses on managing the money supply and credit, influencing short-term interest rates and impacting inflation and overall economic performance. The chapter establishes the foundational contrast and interdependence of these two key approaches to economic management.
II. Monetary Policy: This chapter delves into the objectives of monetary policy. It introduces the "magic triangle," a model encompassing price stability, full employment, and a balanced foreign trade as key goals. The chapter then explores each objective in detail. For example, "full employment" is discussed within the context of market forces and potential government intervention. This section lays the groundwork for a deeper understanding of how various goals of monetary policy interact and the challenges involved in achieving them simultaneously. The chapter's significance lies in clarifying the multifaceted nature of monetary policy and the delicate balancing act required to reach its stated objectives.
Keywords
Monetary policy, fiscal policy, economic development, price stability, full employment, foreign trade balance, interest rates, money supply, national bank, "magic triangle," economic welfare.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this text?
This text is a comprehensive language preview providing an overview of a work exploring the objectives and limitations of monetary policy, its relationship to fiscal policy, and their combined impact on economic development and welfare.
What are the key policy areas discussed?
The text focuses primarily on monetary policy and its objectives, but also introduces fiscal policy as a contrasting and interdependent approach to economic management. It examines how both policies influence economic development and welfare.
What are the main objectives of monetary policy according to this text?
The text highlights several key objectives of monetary policy, often represented by the "magic triangle": price stability, full employment, and a balanced foreign trade (or balance of exchange rates). The text also mentions equity and economic growth as additional goals.
What tools are used to implement monetary policy?
While the specific tools aren't detailed, the text mentions that national banks utilize various tools to implement monetary policy, influencing the money supply and credit, and ultimately impacting short-term interest rates and inflation.
What are the limitations of monetary policy discussed in the text?
The text acknowledges that there are inherent limitations in the effective application of monetary policy, suggesting that achieving all objectives simultaneously presents significant challenges. The specifics of these limitations are not elaborated upon in this preview.
What is the "magic triangle" in the context of monetary policy?
The "magic triangle" refers to the three main, often interconnected, objectives of monetary policy: price stability, full employment, and a balanced foreign trade (or balance of exchange rates). Achieving all three simultaneously is a significant challenge.
How does fiscal policy relate to monetary policy?
The text establishes a contrast and interdependence between fiscal and monetary policy. Fiscal policy involves government decisions on taxation and spending, influencing macroeconomic conditions, while monetary policy focuses on managing the money supply and credit. Both play a significant role in economic development and welfare.
What is the overall aim of the text?
The text aims to explore the objectives of monetary policy, the tools used to achieve them, and the limitations in their effective application. It also examines the relationship between monetary policy, fiscal policy, and their impact on economic development and welfare.
What are the key chapters covered in the text?
The text includes chapters on policies influencing economic development and welfare (covering both fiscal and monetary policies), a detailed chapter on monetary policy (including objectives and tools), a chapter on the limitations of monetary policy, a bibliography, and an appendix on welfare and welfare change.
Where can I find additional information?
The text includes a bibliography, directing the reader to further sources for more in-depth information on the topics discussed.
- Citation du texte
- Dipl.-Betriebswirt (FH) Christian Nicke (Auteur), 2007, Objectives of Monetary Policy, Munich, GRIN Verlag, https://www.grin.com/document/80392
