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fiscal and monetary policy - 1 Monetary policy involves the...

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1. Monetary policy involves the Central Bank - they can change the interest rate, they can change bank's requirement for lending and how much reserves they hold - all of these things effecting the money supply. Adding more money to the economy is expansionary in the short term, but inflationary in the long term. Taking money out of the economy is contractionary. The idea is that the amount of money in the economy is important because at times people want to hold more money and at other times they want to spend more money. If everyone wants to hold more money than they have, you are in a situation where spending stops, and businesses can't afford to continue operating. Thus the money supply is important. Fiscal policy is the government's budget. The government can spend more and cut taxes, which would be expansionary; or they can cut spending and raise taxes, which would be contractionary. The idea here is that if people don't want to spend money, and central
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