Macroeconomic Policies Money and Monetary policy

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Fiscal Policy
Monetary policy
Supply Side policy

Fiscal Policy Monetary policy Supply Side policy

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Attempts to influence the level of economic activity (the amount of buying

Attempts to influence the level of economic activity (the amount of buying
and selling in the economy) through changes to the amount of money in circulation and the price of money – short-term interest rates.
Interest rates the key area of Monetary Policy

Monetary Policy

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Short-term interest rates set by Bank Negara Malaysia;
Basis of Monetary Policy is

Short-term interest rates set by Bank Negara Malaysia; Basis of Monetary Policy
that there is a long run relationship between the amount of money and inflation;
Monetary policy looks also into:-
Demand for Money – the amount people wish to hold as cash as opposed to other assets
The Supply of Money – the amount of money in circulation in the economy

Monetary Policy…cont’d

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Monetary Policy

The Classical Quantity Theory of Money:
MV = PY
(where M =

Monetary Policy The Classical Quantity Theory of Money: MV = PY (where
the money stock, V = velocity of circulation, P = price level and Y = level of national income
Velocity?

1.

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Velocity of Circulation
The number of times annually that money on average is

Velocity of Circulation The number of times annually that money on average
spent on goods and services that make up GDP.

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Incentives
Education and Training
Investment
Technology Improvements
Productivity/Efficiency

Supply Side Policy

2.

Incentives Education and Training Investment Technology Improvements Productivity/Efficiency Supply Side Policy 2.

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Intention is to shift the aggregate supply curve to the right, increasing

Intention is to shift the aggregate supply curve to the right, increasing
the long term productive capacity of the economy;
Tend to be long-term policies;
Arguments about how effective they are – e.g. lowering taxes increases incentives, reducing welfare dependency increases the urge to find work

Supply Side Policy

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Aggregate Supply and Demand

Aggregate Supply and Demand

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Supply Side Policy

Policies aim to influence productivity and efficiency of the economy;
Key

Supply Side Policy Policies aim to influence productivity and efficiency of the
feature – open up markets and de-regulate to improve efficiency in the working of markets and the allocation of resources

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Main areas of policy:
Labour Market – reduce barriers to free market, reduce

Main areas of policy: Labour Market – reduce barriers to free market,
bureaucracy and ‘red tape’ Short term contracts
Flexible working arrangements
Hiring and firing
Contracts, terms and conditions, pay

Supply Side Policy

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Education and Training:
National Qualifications framework –logical set of qualifications
Expansion of vocational qualifications
Expansion

Education and Training: National Qualifications framework –logical set of qualifications Expansion of
of university access

Supply Side Policy

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Incentives and technology:
Tax reform to encourage incentives and entrepreneurial spirit
Incentives to develop

Incentives and technology: Tax reform to encourage incentives and entrepreneurial spirit Incentives
new technology – investment
Drive to embracing ‘knowledge driven economy’
Regional policies to encourage enterprise, investment, location, expansion

Supply Side Policy

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Influencing the level of economic activity though manipulation of government income and

Influencing the level of economic activity though manipulation of government income and
expenditure
Influence Aggregate Demand –
Tax regime influences consumption (C) and investment (I)
Government Spending (G)
Influences key economic objectives
Acts as an ‘automatic stabiliser’
BUT:

Fiscal Policy

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Also used to influence non-economic objectives and provide framework for supply side

Also used to influence non-economic objectives and provide framework for supply side
policy;
e.g. education and health, poverty reduction, welfare reform, investment, regional policies, promotion of enterprise, etc.

Fiscal Policy

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