Macroeconomic Policies Money and Monetary policy

Fiscal Policy
Monetary policy
Supply Side policy

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

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

Monetary Policy
The Classical Quantity Theory
of Money:
MV = PY
(where M = the money stock, V = velocity of circulation, P = price level and Y = level of national income
Velocity?
1.

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

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

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

Aggregate Supply and Demand

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

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

Education and Training:
National Qualifications framework –logical set of qualifications
Expansion of vocational qualifications
Expansion of university access
Supply Side Policy

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

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

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