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Julian Lake - What is the impact of...?
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- Fiscal Policy Tools and Their Impact on Inflation
- Government SpendingIf the government decreases their spending, this leads to a decrease in aggregate demand and inflationary pressure
- Increase in TaxesIf the government increases taxes, this leads to a decrease in disposable income, consumption, and demand
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- Monetary Policy Tools (Federal Reserve) and Their Impact on Inflation
- Open Market Operations (OMO)If the Federal Reserve sells government bonds, this leads to a decrease in money supply, an increase in interest rates, and a decrease in spending
- Discount RateIf the Federal Reserve raises the discount rate, this leads to less lending to banks, which then leads to a decrease in spending
- Reserve RequirementIf the Federal Reserve increases the reserve requirement, this leads to an increase in money held by banks and a decrease in lending
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- Impact of Monetary Policy on Loanable Funds and AD/AS
- Money SupplyA decrease in the money supply leads to an increase in interest rates. This also leads to the supply of loanable funds shifting left on an AD/AS graph.
- Interest RatesAn increase in interest rates leads to a decrease in investment and consumption. This will leads to aggregate demand shifting left on an AD/AS graph.
- Monetary policy is more effective than fiscal policy because it is able to tackle inflation faster and can directly affect interest rates.
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