Lecture 7-fiscal and monetary policy.pptx - Economy of Ghana Lecture 7 Fiscal and Monetary Policy in Ghana Lecturer Forster Shitsi Jnr Course Objectives

Lecture 7-fiscal and monetary policy.pptx - Economy of...

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Economy of Ghana Lecture 7: Fiscal and Monetary Policy in Ghana Lecturer: Forster Shitsi Jnr.
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Course Objectives At the end of this course, students should be able to: Explain fiscal and monetary policy concepts used in economics. Identify the instruments of fiscal policy and the tools for monetary policy in Ghana. Explain some fiscal policy outcomes in Ghana Appreciate the objectives of monetary policy in Ghana
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Presentation Outline Fiscal policy Fiscal policy choices Fiscal policy outcomes in Ghana The concept of monetary policy Purpose and tools of monetary policy in Ghana Objectives of monetary policy in Ghana
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Tools used by the state The state uses two tools to achieve its macroeconomic objectives of stabilizing the economy. These two tools are Fiscal and Monetary policies.
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Fiscal Policy - Introduction Fiscal policy refers to the use of government revenue (mainly taxes) and government expenditure to achieve a macroeconomic goal of stabilizing the economy. THE NEED FOR THE GOVERNMENT The government is needed in the economy for the following reasons: 1. To ensure macroeconomic stability 2. To correct market failures especially public goods and externalities
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FISCAL POLICY AND THE AD/AS MODEL Simplifying assumptions: 1. Assume initial government purchases don’t depress or stimulate private spending. 2. Assume fiscal policy affects only the demand, not supply, side of the economy.
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FISCAL POLICY CHOICES 1. Expansionary fiscal policy: used to combat a recession. Any change in taxes or government spending that stimulate Aggregate Demand. Taxes OR Government expenditure or both 2. Contractionary fiscal policy: used to combat demand-pull inflation, due to excess spending. Any change in taxes or government spending that reduces Aggregate Demand. Taxes OR Government expenditure or both
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EXPANSIONARY FISCAL POLICY Expansionary fiscal policy is the use of government spending, taxation and transfer payments to stimulate aggregate demand. Whether the government is increasing its own purchases, lowering taxes or raising transfer payments, expansionary fiscal policy always increases at least one component of aggregate demand (AD = C + I + G + X –M). It could be a combination of increased G spending and reduced taxes. If the budget was initially balanced, expansionary fiscal policy creates a budget deficit . A budget is said to be in deficit if the government spends more than the revenue it has generated in that fiscal year ( Government Expenditure > Government Revenue )
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Transmission Mechanism of a Fiscal POLICY - Expansionary Expansionary fiscal policy takes the form of an increase in government spending or a cut in taxes. Increase in government expenditure increase in employment increase in incomes Adds to consumer demand.
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