1
Chapter 7
Macroeconomic
Policies
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Topics to be Discussed
? 7.1 Fiscal policies and effects
? 7.2 Monetary policies and effects
? 7.3 Policy mix
? 7.4 Economic fluctuation and
eliminating the fluctuations with
economic policies
? 7.5 Macroeconomic policy practice
7.1 Fiscal Policy and Effects
?Concept of fiscal policy
?Fiscal policy is the macroeconomic policy
that the government implements by adjusting
the aggregate demand to control
unemployment,inflation and to realize
economic growth and the balance of
international payments,
7.1 Fiscal Policy and Effects
? Instruments
?Government purchase
?Government transfer
?Taxation
?Government bond
?Automatic stabilizer
?Also named interior stabilizer,It’s a kind of
mechanism existing in economic system
which can counteract the effects of shocks
on output,
7.1 Fiscal Policy and Effect
7.1 Fiscal Policy and Effects
?Automatic Stabilizer
?In depression,
? Y ? ? TR↑? C ↑ ? AE↑ ? Y ↑
?In flourish,
? Y ↑ ? T ↑ ? C ? ? AE ? ? Y ↑
7.1 Fiscal Policy and Effects
? Developing Stages of Western Fiscal Policies
? 1936 ~ 1945,anti-depression,simple and inflationary
fiscal policy
? 1945 ~ 1961:anti-business-cycle and compensative
fiscal policy
? 1961 ~ 1979,fiscal policies with full employment
budget
? 1981 ~ 1991:fiscal policies of supply-side school
7.1 Fiscal Policy and Effects
?Annual Balance Budget
?Cyclical Balance Budget
?Full-employment Balance Budget
R LM
IS1
Y Y1
R1
A
IS2
B R2
Y2
R LM
IS1
Y Y1
R1 A
IS2
B R2
Y2
Total tax↑,IS shifts to the left Tax rate↑,IS becomes more steep
Fiscal policy,IS curve shifts
?Crowding-out Effect
?Pro-economic fiscal policy will lead to a
increase in interest rate and personal
investment is crowded out,
?G↑ ? AE ↑? AE > Y ? Y ↑
?Y↑ ? Md ↑ ? Md > Ms ? R ↑
?R ↑ ? I ?
7.1 Fiscal Policy and Effects
Crowding-out Effect
R
LM IS1
Y Y1
R1
A
IS2
B
R2
Y2
F
AF =ΔG /MPS
Crowding-
out effect
G increases
7.1 Fiscal Policy and Effects
R
LM1
IS1
Y Y1
R1
A
IS2
B
R2
Y2
Crowding-out effect
LM2
C R3
Y3
7.2 Monetary Policy and Effects
? Concept of Monetary Policy
? Monetary policy is the macroeconomic policy that
the central bank implements by controlling money
supply to adjust interest rate and to influence the
whole economy aiming at the realization of some
specific goals,
?General Aims
?Full employment,economic growth,stable
price,stable exchange rate and keep the
balance of payments,etc,
?Special Aims
?Avoiding large scale bank-run and financial
panics,stabilizing interest rate,
7.2 Monetary Policy and Effects
?Instruments
?reserve ratio
?Open market operation
?Rediscount rate
?Moral suasion
7.2 Monetary Policy and Effects
7.2 Monetary Policy and Effects
?Reserve Ratio
?Central bank can change the reserve ratio to
influence money supply and interest rate,
?Features, simple but not fit for using
frequently
?Rediscount Rate
?Central bank could change the rediscount
rate to influence the reserve money in bank
system and the interest rate,Further it can
also determine money stock and achieve the
macroeconomic aims,
?Features, often used with open market
operation
7.2 Monetary Policy and Effects
?Open Market Operation
?Central bank could control money supply
and interest by buying or selling
government securities in financial market,
?Features, feasible； the influence on
money supply is predictable
7.2 Monetary Policy and Effects
7.2 Monetary Policy and Effects
?Moral Suasion
Ms increase
R
LM1
IS
Y Y1
R1
A
LM2
B R
2
Y2
Monetary Policy,LM Curve Shifts
7.2 Monetary Policy and Effects
r
LM1
IS1
Y Y0
r0
A
LM2
r1
Y1
IS2
Y2
r2 C
B
The smaller MPS is，
the more Y ↑
Effectiveness of Two Policies,
When LM is Level
R
LM
IS1
Y Y1
R1 A
IS2
B
Y2
R
LM
IS1
Y Y1
R1 A
Fiscal policy
effective
Monetary
policy
ineffective
G↑ Ms↑
Effectiveness of Two Policies,
When LM is Vertical
R
LM
IS1
Y Y1
R1 A
B
R
LM1
IS1
Y Y1
R1 A
Fiscal policy
ineffective
Monetary policy
effective
R2
G↑ Ms↑
R2
Y2
LM2
IS2
B
Effectiveness of Two Policies,
When IS is Vertical
R
LM IS1
Y Y1
R1 A
IS2
B
R LM1 IS
Y Y1
R1 A
Fiscal policy
effective
Monetary policy
ineffective
R2
G↑ Ms↑ LM2
R2 B
Y2
Effectiveness of Two Policies,
When IS is Level
R
IS
LM
Y Y1
R1 A
R
LM1
IS
Y Y1
R1 A
Fiscal policy
ineffective
Monetary policy
effective
G↑ Ms↑
LM2
B
Y2
7.3 Policy Mix
? monetary-fiscal policy mix( the policy mix)
Effectiveness of policy mix
IS shifts LM
shifts
Output
change
Interest rate
change
Tax increases left none down down
Tax decreases right none up up
Expenditure
increases
right none up up
Expenditure
decreases
left none down down
Money supply
increases
none down up down
Money supply
decreases
none up down up
7.3 Policy Mix
? Depression but not severe
? Pro-economy fiscal policy,austerity monetary
policy
? Economic overheating and serious inflation
austerity fiscal policy,austerity monetary policy
? Inflation but not severe
? Austerity fiscal policy,pro-economy monetary
policy
? Severe depression
? Pro-economy fiscal policy,pro-economy monetary
policy,
R
LM1
IS1
Y Y1
R2 A
LM2
B
Y2
IS2 R1
Policy Mix,
IS and LM Shift Simultaneously
G↑ Ms↑
AS
AD0
AD1
Y
P0
O
P
E2
E0 E1
Y Y1 -
P2
Demand
shock
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies AS
AD
Y
P1
O
P
E0
E1
Y Y1 -
P0
Supply
shock
AS1
AS
AD0
AD1
Y
P0
O
P
E’
E0 E1
Y Y1
policies
shock
s
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies
Counteract
demand shocks
-
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies AS
AD1
AD0
Y
P1
O
P
E0
E2 E1
Y Y1 -
P0
shoc
ks
policies
Counteract
supply shocks
AS1
7.4 Economic Fluctuation and
Eliminating Fluctuations With
Economic Policies
? Fiscal policy,government adjusts taxation and
expenditure aggregate,which leads to the change
of demand,to influence employment and national
income,
? Central bank adjusts demand through changing
money supply in bank system,
? The two policies both influence the demand through
the influence on interest rate and investment,
7.5 Macroeconomic Policy Practice
?Aims
?Full employment
?Stable price
?Economic growth
?Balance of payments
?Relationship Between Four Aims
? unitive but also conflict
? Full employment and stable price
? Full employment and economic growth
? Full employment and balance of payments
7.5 Macroeconomic Policy
Practice
?Comparison Between Two Policies,
?Similarity,
?Both adjust national income to realize the
aims of stabilizing price,full employment
and economic growth,
?can both be divided into two categories,
pro-economic or austerity
7.5 Macroeconomic Policy
Practice
7.5 Macroeconomic Policy Practice
?Comparison Between Two Policies,
?Differentia,
?Fiscal policy can influence the scale of
aggregate demand directly;
?Monetary policy influences aggregate demand
indirectly through the change of interest rate,
38
Chapter 7
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Chapter 7
Macroeconomic
Policies
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Topics to be Discussed
? 7.1 Fiscal policies and effects
? 7.2 Monetary policies and effects
? 7.3 Policy mix
? 7.4 Economic fluctuation and
eliminating the fluctuations with
economic policies
? 7.5 Macroeconomic policy practice
7.1 Fiscal Policy and Effects
?Concept of fiscal policy
?Fiscal policy is the macroeconomic policy
that the government implements by adjusting
the aggregate demand to control
unemployment,inflation and to realize
economic growth and the balance of
international payments,
7.1 Fiscal Policy and Effects
? Instruments
?Government purchase
?Government transfer
?Taxation
?Government bond
?Automatic stabilizer
?Also named interior stabilizer,It’s a kind of
mechanism existing in economic system
which can counteract the effects of shocks
on output,
7.1 Fiscal Policy and Effect
7.1 Fiscal Policy and Effects
?Automatic Stabilizer
?In depression,
? Y ? ? TR↑? C ↑ ? AE↑ ? Y ↑
?In flourish,
? Y ↑ ? T ↑ ? C ? ? AE ? ? Y ↑
7.1 Fiscal Policy and Effects
? Developing Stages of Western Fiscal Policies
? 1936 ~ 1945,anti-depression,simple and inflationary
fiscal policy
? 1945 ~ 1961:anti-business-cycle and compensative
fiscal policy
? 1961 ~ 1979,fiscal policies with full employment
budget
? 1981 ~ 1991:fiscal policies of supply-side school
7.1 Fiscal Policy and Effects
?Annual Balance Budget
?Cyclical Balance Budget
?Full-employment Balance Budget
R LM
IS1
Y Y1
R1
A
IS2
B R2
Y2
R LM
IS1
Y Y1
R1 A
IS2
B R2
Y2
Total tax↑,IS shifts to the left Tax rate↑,IS becomes more steep
Fiscal policy,IS curve shifts
?Crowding-out Effect
?Pro-economic fiscal policy will lead to a
increase in interest rate and personal
investment is crowded out,
?G↑ ? AE ↑? AE > Y ? Y ↑
?Y↑ ? Md ↑ ? Md > Ms ? R ↑
?R ↑ ? I ?
7.1 Fiscal Policy and Effects
Crowding-out Effect
R
LM IS1
Y Y1
R1
A
IS2
B
R2
Y2
F
AF =ΔG /MPS
Crowding-
out effect
G increases
7.1 Fiscal Policy and Effects
R
LM1
IS1
Y Y1
R1
A
IS2
B
R2
Y2
Crowding-out effect
LM2
C R3
Y3
7.2 Monetary Policy and Effects
? Concept of Monetary Policy
? Monetary policy is the macroeconomic policy that
the central bank implements by controlling money
supply to adjust interest rate and to influence the
whole economy aiming at the realization of some
specific goals,
?General Aims
?Full employment,economic growth,stable
price,stable exchange rate and keep the
balance of payments,etc,
?Special Aims
?Avoiding large scale bank-run and financial
panics,stabilizing interest rate,
7.2 Monetary Policy and Effects
?Instruments
?reserve ratio
?Open market operation
?Rediscount rate
?Moral suasion
7.2 Monetary Policy and Effects
7.2 Monetary Policy and Effects
?Reserve Ratio
?Central bank can change the reserve ratio to
influence money supply and interest rate,
?Features, simple but not fit for using
frequently
?Rediscount Rate
?Central bank could change the rediscount
rate to influence the reserve money in bank
system and the interest rate,Further it can
also determine money stock and achieve the
macroeconomic aims,
?Features, often used with open market
operation
7.2 Monetary Policy and Effects
?Open Market Operation
?Central bank could control money supply
and interest by buying or selling
government securities in financial market,
?Features, feasible； the influence on
money supply is predictable
7.2 Monetary Policy and Effects
7.2 Monetary Policy and Effects
?Moral Suasion
Ms increase
R
LM1
IS
Y Y1
R1
A
LM2
B R
2
Y2
Monetary Policy,LM Curve Shifts
7.2 Monetary Policy and Effects
r
LM1
IS1
Y Y0
r0
A
LM2
r1
Y1
IS2
Y2
r2 C
B
The smaller MPS is，
the more Y ↑
Effectiveness of Two Policies,
When LM is Level
R
LM
IS1
Y Y1
R1 A
IS2
B
Y2
R
LM
IS1
Y Y1
R1 A
Fiscal policy
effective
Monetary
policy
ineffective
G↑ Ms↑
Effectiveness of Two Policies,
When LM is Vertical
R
LM
IS1
Y Y1
R1 A
B
R
LM1
IS1
Y Y1
R1 A
Fiscal policy
ineffective
Monetary policy
effective
R2
G↑ Ms↑
R2
Y2
LM2
IS2
B
Effectiveness of Two Policies,
When IS is Vertical
R
LM IS1
Y Y1
R1 A
IS2
B
R LM1 IS
Y Y1
R1 A
Fiscal policy
effective
Monetary policy
ineffective
R2
G↑ Ms↑ LM2
R2 B
Y2
Effectiveness of Two Policies,
When IS is Level
R
IS
LM
Y Y1
R1 A
R
LM1
IS
Y Y1
R1 A
Fiscal policy
ineffective
Monetary policy
effective
G↑ Ms↑
LM2
B
Y2
7.3 Policy Mix
? monetary-fiscal policy mix( the policy mix)
Effectiveness of policy mix
IS shifts LM
shifts
Output
change
Interest rate
change
Tax increases left none down down
Tax decreases right none up up
Expenditure
increases
right none up up
Expenditure
decreases
left none down down
Money supply
increases
none down up down
Money supply
decreases
none up down up
7.3 Policy Mix
? Depression but not severe
? Pro-economy fiscal policy,austerity monetary
policy
? Economic overheating and serious inflation
austerity fiscal policy,austerity monetary policy
? Inflation but not severe
? Austerity fiscal policy,pro-economy monetary
policy
? Severe depression
? Pro-economy fiscal policy,pro-economy monetary
policy,
R
LM1
IS1
Y Y1
R2 A
LM2
B
Y2
IS2 R1
Policy Mix,
IS and LM Shift Simultaneously
G↑ Ms↑
AS
AD0
AD1
Y
P0
O
P
E2
E0 E1
Y Y1 -
P2
Demand
shock
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies AS
AD
Y
P1
O
P
E0
E1
Y Y1 -
P0
Supply
shock
AS1
AS
AD0
AD1
Y
P0
O
P
E’
E0 E1
Y Y1
policies
shock
s
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies
Counteract
demand shocks
-
7.4 Economic Fluctuation and
Eliminating Fluctuations With Economic
Policies AS
AD1
AD0
Y
P1
O
P
E0
E2 E1
Y Y1 -
P0
shoc
ks
policies
Counteract
supply shocks
AS1
7.4 Economic Fluctuation and
Eliminating Fluctuations With
Economic Policies
? Fiscal policy,government adjusts taxation and
expenditure aggregate,which leads to the change
of demand,to influence employment and national
income,
? Central bank adjusts demand through changing
money supply in bank system,
? The two policies both influence the demand through
the influence on interest rate and investment,
7.5 Macroeconomic Policy Practice
?Aims
?Full employment
?Stable price
?Economic growth
?Balance of payments
?Relationship Between Four Aims
? unitive but also conflict
? Full employment and stable price
? Full employment and economic growth
? Full employment and balance of payments
7.5 Macroeconomic Policy
Practice
?Comparison Between Two Policies,
?Similarity,
?Both adjust national income to realize the
aims of stabilizing price,full employment
and economic growth,
?can both be divided into two categories,
pro-economic or austerity
7.5 Macroeconomic Policy
Practice
7.5 Macroeconomic Policy Practice
?Comparison Between Two Policies,
?Differentia,
?Fiscal policy can influence the scale of
aggregate demand directly;
?Monetary policy influences aggregate demand
indirectly through the change of interest rate,
38
Chapter 7
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
