Money

1
 Money:

Money may be defined as anything that is

generally acceptable as a medium of
exchange and at the same time acts as a
measure and as a store of value.
 Functions of Money:
A medium of exchange
A standard of value
A store of value
A standard of deferred payment
Unit of value
 Characteristics of Good
Money:
1. General Acceptability
2. Transferability
3. Durability
4. Recognizability
5. Homogeneity
6. Divisibility
 Commercial Bank

A commercial bank is a type

of bank that provides services such as
accepting deposits, making business
loans, and offering basic investment
products that is operated as a business
for profit.
 Functions of Commercial
Bank:
1. Providing payment mechanism
2. Providing a place for individuals, firms and
government to store their wealth.
3. Lending money as loans, e.g. overdraft
4. Acting as financial intermediary
5. Providing customer a means of foreign currency
buying, selling and transfer
6. Providing assistance to exporter and importers
7. Leasing facilities
8. Providing house building loans
 Central Bank

A central bank is a bank which acts

on behalf of the government to
supervise, regulate and control the
country’s banking system:
 Functions of Central Bank:
1. Bank of issue
2. Banker to government
3. Bankers’ Bank
4. Bank as Clearing House
5. Advisor to Government
6. Lender of Last Resort
 Discretionary Fiscal Policy
Discretionary Fiscal Policy
The discretionary changes in government
expenditures and/or taxes in order to achieve
certain national economic goals is the realm of
fiscal policy.
High employment (low unemployment)
Price stability
Economic growth
Improvement of international payments balance
 Discretionary Fiscal Policy
(cont'd)
Fiscal Policy
The discretionary changing of government
expenditures or taxes to achieve national
economic goals, such as high employment
with price stability
Fiscal Policy

The Government Budget

• Sources of government revenue
• Types of government expenditures
• The budget outcome

The Role of Fiscal Policy

• Fiscal policy and short-term demand management
• The impact of automatic stabilizers
• Fiscal policy and its impact on potential output
• Evaluation of Fiscal Policy
 What is a tax, anyway?
A mandatory
payment/fee to
government in order
to fund
goods/service to
public
Fiscal Policy
Introduction to Fiscal Policy
In an effort to promote the macroeconomic objective (price level
stability, economic growth and full employment) policy-makers have
a variety of tools at their disposal. One set of tools PL
is knownLRAS
as SRAS
fiscal
policy.
Fiscal Policy: Changes in the level of government spending A) P e

and taxation aimed at either increasing or decreasing the

level of aggregate demand in an economy to promote the
AD
macroeconomic objectives. Fiscal policy is a type of demand-
side policy
• Economy A) An economy producing at full- real GDP
Yfe
employment is not in need of any fiscal policy PL LRAS
SRAS
actions, however…
• Economy B) An economy in a recession could
benefit from expansionary demand-side policies that B
increase AD and therefore employment and output )
closer to the full employment level. Pe
• If AD is too high and has high inflation an economy
could benefit from contractionary demand-side AD
policies that reduce AD. Y1
real GDP
Fiscal Policy
The Government Budget – Sources of Revenue
Fiscal policy puts the government’s budget into action to stimulate
or contract AD as needed. The budget is simply the combination of
revenues earned from taxes and expenditures made by all goods and
services by nation’s government in a year.

Tax revenues: A government’s primary source of revenues is through

the collection of taxes.
• Direct taxes: Taxes on incomes earned by households and firms.
These are usually progressive in nature, meaning that the
percentage paid increases as income increases, or proportional,
meaning that all individuals (or firms) pay the same percentage no
matter what their income.
• Indirect taxes: Taxes on consumption are indirect, meaning they
are actually paid by the sellers goods, but they are born by both
producers and consumers.
2.4 Fiscal Policy The Government Budget

The Government Budget – Types of Expenditures

While a government’s revenues come from the taxes it collects. its expenditure depend on
the goods and services the government provides the nation. Government expenditures
include:

• Current Expenditures: This is the day to day cost of running the government. The wages
and salaries of public employees, including in local, state and national government, such
as police, teachers, legislatures, military servicemen, judges, etc…

• Capital Expenditures: These are investments made by the government in capital

equipmente and infrastructure, such as money spent on roads, bridges, schools,
hospitals, military equipment, courthouses, etc...

• Transfer payments: This type of government spending does not contribute to GDP
(unlike those above), because income is only transferred from one group of people to
another in the nation. Includes welfare and unemployment benefits, subsidies to
producers and consumers, etc… Money transferred by the government from one group
to another, without going towards the provision of an actual good or service.
2.4 Fiscal Policy The Government Budget

The Government Budget – Surpluses and Deficits

In a particular year, a government’s budget can either be balanced,
in surplus or in deficit. The net effect on aggregate demand depends
on the government’s budget balance.

A balanced budget: A government’s budget is in balance if its expenditures in a year equals its tax
revenues for that year. A balanced budget will have no net effect on aggregate demand since the
leakages (taxes collected) equal the injection (expenditures made).

A budget surplus: If, in a year, the government collects MORE in taxes than it spends, the budget is in
surplus. A surplus may sound like a good thing, but in fact the net effect of a budget surplus on AD is
negative, since leakages exceed injections. A budget surplus will reduce the national debt.

A budget deficit: If a government’s expenditure in a year a greater than the tax revenue it collects, the
government’s budget is in deficit. A deficit has a positive net effect on AD, since injections exceed
leakages from the government sector. A budget deficit will add to the national debt.

The national debt: A nation’s debt is the sum of all its past deficit minus its past surpluses. If this
number is negative, then it means the government has borrowed money over the years to finance its
deficits that it has not paid back through accumulated surpluses
2.4 Fiscal Policy The Role of Fiscal Policy

The Role of Fiscal Policy

A size of the government sector relative to a nation’s economy varies
greatly from country to country.
Government spending as a
proportion of total AD: Study the
chart to the right.
• Notice that government spending is the largest
component of GDP for the countries on the left,
and
• A much smaller component of GDP for the
countries on the right.
• In a country where government spending is a
larger component, the impact of fiscal policy can
be greater than where it is a smaller proportion
of GDP

Fiscal policy provides government

with a tool for managing the level
of AD through changes in taxation
and government spending
Taxation General Categories
Government can Government can also
reward behavior
discourage behavior
via taxes
Tax deductions
Direct taxes
Ex=Charity Giving
Ex=Income
Tax credits
Indirect taxes
Cost of Solar Panels
EX=Sales Tax
Tax exemptions
“Sin Taxes”
Revitalize Depressed
Ex= Marijuana taxed area
per gram
 How taxes effect payers
3 possible effects of taxes
Proportional %
Everyone pays the same percentage of tax
Sales taxes
Progressive %
The more you make, the more they take
Income tax rates at 10%,15%,18%, 33%, Capital Gains
taxes
Regressive $
Flat Fees have a greater impact on lower incomes
User Fees for National Parks, Driver’s licenses
Proportional taxes can also be regressive
 Deficit & Debt
Federal deficit occurs when government spending
(purchases & transfers) exceeds tax receipts

Federal debt is the amount of funds the government

must borrow to cover its deficit

Money is owed to government agencies, private

individuals and firms, and foreign individuals,
companies, and countries
 Size of Debt
Size of the debt is measured by the
debt ratio: government debt as a
percentage of the GDP

Debt ratio in U.S. in 1998 = 65, less

than Belgium (125), Italy (123), and
Japan (93), but more than Australia
(40), Finland (59) and U.K. (60)
Government Influence:
Aggregate Demand
Government can influence economic
activity with aggregate demand side
policies affecting:
Taxes
Government Spending
Interest Rates
 Government Influence:
Aggregate Supply
Government can influence economic
activity with aggregate supply side policies
affecting
input costs (labor and wage)
reducing regulation
Increase incentives to
Work
Take Risks
The actions are call Supply Side
Economics