• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Evaluate the effects on income and the rate of interest of a decision to meet the government's budget constraint by way of (a) an increase in taxes (b) a rise in monetary supply (c) increased bonds sales.

Extracts from this document...

Introduction

1. Evaluate the effects on income and the rate of interest of a decision to meet the government's budget constraint by way of (a) an increase in taxes (b) a rise in monetary supply (c) increased bonds sales Lecture notes 06/11/03 SMG 206... Plan: Intro. Budget Constraint: - Simply means that all g'ment expenditure must be financed; it is not a restraint on spending, but a recognition of need always to meet the financing requirement. Diagram of Budget constraint, can be covered in 3 ways. Effects on Y & r of ? taxes Effects on Y & r of ? monetary supply Effects on Y & r of ? Bond sales Conclusion (including evaluation of effective methods) G ?, IS shifts out. G'ment outlay curve moves down Income and r increase Gap between G & T represents Budget deficit which must be covered. Three ways to cover this budget deficit: a) ...read more.

Middle

b: - ? Monetary Supply by equivalent amount of increase in G As before, IS and Government outlay curve move together, but now there is also a shift in the LM curve. This reinforces the expansionary effect of the increase in G. It is partly due to this conclusion that the monetarists claim that fiscally oriented policies will exert a minor impact unless they are accompanied by accommodating changes in the money supply. At new equilibrium Y is higher than in standard cases, but interest rate much lower. This is the second most expansionary policy of the 3. c: - Increase in bond sales to the private sector by equivalent amount to increase in government spending. Debt finance: A rise in the quantity of debt payments means more interest paid out to the public. Two effects: - 1 Increase in disposable income- induces a rise in consumption and hence further shift right of IS curve. ...read more.

Conclusion

However, it could cause problems due to the increase in interest rate. This position rests fundamentally upon three assumptions which are seldom explicitly specified: 1) All requisite bonds can be sold. There is no limit to the extent to which the authorities can sell government bonds. This does not have universal application. In many of the less advanced economics, for example, the absence of confidence in the government of the day virtually prohibits this method of finance. 2) Public do not equate bonds to taxes (Ricardo-Barro Equivalence). 3) The resultant bond sales generate wealth effects. Whether bonds issued by the central government constitute net wealth from the viewpoint of the private sector is altogether a different issue and one which has generated considerable controversy. If fiscal (sell more bonds) and monetary policy (increase money supply) were used together simultaneously, then expansion would take place without the problem of making the interest rate too unstable. We must remember to consider shapes and positions of IS and LM curves. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Marked by a teacher

    Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy)

    4 star(s)

    Investment would increase as it would become more lucrative to invest in the country due to lower taxes and cheaper credit.

  2. Discuss whether the privatisation of British Rail has been successful. Evaluate whether the new ...

    Commentators have rightly observed that Britain has lost its capacity to organise and manage major public sector developments. Another advantage of shifting most of the responsibility for planning and financing railways to regional or local government would be the opportunity to transfer projects to passenger transport authorities, Transport for London and regional bodies.

  1. what is economics

    fall in demand, as more consumers would be buying other brands * If a product takes up a very small percentage of a consumer's income (e.g. a banana) - the doubling in price wouldn't affect the quantity demanded that much -it'd be price inelastic * The reverse is true o

  2. Is the Government to Blame for Higher Petrol Prices?

    same product and petrol is taxed with fuel duty and VAT the only discrepancy between rival filling stations will be how low they can cut their costs in the distribution and retail of their petrol. Determinants of Demand for Petrol (Short Run)

  1. In economics we refer to these two acts as tax evasion and tax avoidance. ...

    Heavy rates on wages reduce savings. Since investments depend on savings, the former will also be reduced. A rate structure that hits lower incomes reduces current consumption and correspondingly encourages growth by permitting larger savings. If we consider perfect markets as regards payroll tax, we know that it is indifferent

  2. To what extent do you consider monopolies to be in the public interest?

    One way of attempting to stop this new market from forming would be by cutting prices, so that there would be no incentive to undermine the price set by the monopolist. This way, consumers would benefit from a smaller loss in consumer welfare as well as lower prices.

  1. The Federal Budget in Australia. The three Federal Budget outcomes are budget surplus, budget ...

    There is a positive multiplier effect with the government injections circulating many times in the economy. The multiplier explains why small changes in spending can induce much larger changes in the economy.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    farmers conducted by Friends of the Earth in 2003 showed that many farmers were 'being asked to pay a rebate on an agreed price, waiting over 30 days for an invoice to be paid, incurring additional transport or packaging costs due to changes in supermarket specifications and meeting the costs

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work