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Monetary and Fiscal Policy Interaction July 14, 2010

Posted by petrarcanomics in Role of Government.
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Monetary Policies

Expansionary Monetary Policy

  • reserve requirement decrease
  • discount rate decrease
  • buying bonds and securities from member banks

Contractionary Monetary Policy

  • increase reserve requirement
  • increase discount rate
  • selling bonds and securities to member banks

Fiscal Policies

Expansionary Fiscal Policy

  • cutting taxes
  • increase government spending

Contractionary Fiscal Policy

  • raising taxes
  • decrease government spending

John Maynard Keynes

Policy Combinations

Expansionary Monetary / Expansionary Fiscal

  • interest rates in-determinant
  • investment in-determinant
  • real GDP increase
  • price level increase
  • unemployment rate decrease

Contractionary Monetary / Contractionary Fiscal

  • interest rates in-determinant
  • investment in-determinant
  • real GDP decrease
  • price level decrease
  • unemployment rate increase

Contractionary Monetary / Expansionary Fiscal

  • interest rates increase
  • investment decrease
  • real GDP in-determinant
  • price level in-determinant
  • unemployment rate in-determinant
  • The greatest example of this combination is the early nineteen eighties when Reaganomics and Paul Volcker’s tight money policies were practiced at the same time.
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