POSC 182 Lecture 20 2010

POSC 182 Lecture 20 2010 - POSC 182 Politics and Economic...

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POSC 182: Politics and Economic Policy Unit 3: Policy Tools and Divergent Economic Philosophies Lecture 20: Macroeconomic Policy February 22, 2010
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Monetary Policy Monetary policy is generally a quicker option than fiscal policy in affecting the economy Fiscal policy requires spending bills or tax cuts—regular budgets are made on an annual basis Monetary policy entails expanding/contracting money supply In the short-run, increases in money supply can stimulate economic activity as people have more money to spend. In the long-run, it can lead to inflation Money supply is affected by: Reserve requirements : how much money banks must keep on hand rather than lend out. Lowering the reserve requirement increases the money supply since banks can lend out more money. Open market operations : the buying and selling of government securities (e.g. Treasury bills). Selling securities to banks, decreases the money in the economy. Interest rates : lower interest rates increase money supply since loans are cheaper
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Main goals of central banks: 1) full employment, 2) low inflation, 3) financial regulation, 4) financial stability Recall that there is often a trade-off between employment and inflation (Phillips Curve). Thus, finding the right balance between employment and inflation can be difficult. Different interest groups have different preferences for the
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This note was uploaded on 10/05/2010 for the course POSC 182 taught by Professor Schuelenberg during the Spring '08 term at UC Riverside.

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POSC 182 Lecture 20 2010 - POSC 182 Politics and Economic...

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