Economic Policy

ECONOMIC POLICY

Economic Policy • Use or needed to attain economic objectives/goals such as: - economic growth and development - economic efficiency - equity - economic stability • Can influence the level of aggregate demand and aggregate supply

Fiscal policy •From the root word fisc which refers to the “treasury” of a government

•the spending and taxing policies used by the government to influence the economy

Fiscal policy Three (3) categories 1. policies concerning government purchases of goods and services 2. policies concerning transfer payments to household 3. policies concerning taxes

Fiscal policy Fiscal functions 1. resource allocation function 2. regulatory function 3. redistributive function 4. economic stabilization function

Fiscal policy Sources of public funds 1. Taxes 2. Non-tax revenues a. Fines and fees b. Licenses and registration charges c. Profits earned by government-operated and controlled corporation 3. Borrowing a. Internal (central bank) b. External (foreign governments)

Fiscal policy Uses of public funds - Social services - Economic services - Defense - General public services - Debt service fund

Fiscal policy Expansionary fiscal policy - an increase in government spending or a reduction in net taxes aimed at increasing aggregate output (income)

Fiscal policy Contractionary fiscal policy - a decrease in government spending or an increase in net taxes aimed at decreasing aggregate output (income)

Fiscal policy Discretionary fiscal policy - the changes in taxes or spending that are the result of deliberate changes in government policy.

Fiscal policy Budget deficit (Fiscal deficit) - the difference between what a government spends and what it collects in taxes in a given period. (Negative saving) Budget surplus (Fiscal surplus)

Monetary policy - The behavior of the central bank concerning the nation’s money supply (Case and Fair)

- Tools used to control the money supply to affect the overall price level, interest rates and exchange rates, unemployment rate and level of output. (Sicat)

Money supply - Total amount of money that circulates in the economy - is composed of: currency in circulation, checking accounts, savings and time deposits, short-term debt instruments (bonds, warehouse receipts and letters of credit, royalties and stock certificates), goods

Money • anything that is generally accepted as a medium of exchange • is not income • is not wealth

Functions of money • Medium of exchange or means of payment - what sellers generally accept and buyers generally use to pay or goods and services • Store of value - an asset that can be used to transport purchasing power from one time period to another • Unit of account - a standard unit that provides a consistent way of quoting prices

Evolution of money • Barter – an alternative to a monetary economy - the direct exchange of goods and services in exchange for other goods and services • Commodity monies – items used as money that also have intrinsic value in some other use • Fiat, or token money – items designated as money that are intrinsically worthless

• Liquidity property of money – the property of money that makes it a good medium of exchange as well as a store of value • Legal tender - money that a government has required to be accepted in settlement of debts

• Currency debasement - the decrease in the value of money that occurs when its supply is increased rapidly • Quantity theory of money - the level of prices is due to the amount of money in circulation

Definitions of money M1 (Transactions money) = cash and checking deposits - money that can be directly used for transactions • M2 (Broad money) = M1 + savings deposits + time deposits/money market accounts • M3 = M2 + other deposit substitutes •

Money and Banking • Commercial bank – a business institution that accepts deposits of money and lends to borrowers in return for interest • Bangko Sentral ng Pilipinas - the central bank of the Philippines - responsible for the regulation of money supply and the financial system • Monetary board - policy board of the central bank who sets policies that regulate money supply

Monetary tools • Reserves - the deposits that a bank has at the central bank plus its cash on hand • Required reserve ratio - the percentage of its total deposits that a bank must keep as reserves at the central bank

Monetary tools • Discount rate - interest rate that banks pay to the central bank to borrow from it • Open-market operations - the purchase and sale by the central bank of government securities in the open-market

Monetary tools • Moral suasion - the pressure exerted by the central bank to discourage banks from borrowing heavily from the central bank

Demand for money •Transaction motive - the main reason that people may hold money – to buy things •Speculation motive - one reason for holding bonds instead of money

• Contractionary/tight monetary policy - central bank’s policies that contract money supply in an effort to restrain the economy • Expansionary/easy monetary policy - central bank policies that expand the money supply in an effort to stimulate the economy

Monetary standards •The gold standard •Bretton Woods system •Floating rates

Trade policy - policy applied to international trade (exports and imports) • Tariff a. Revenue tariff – tax on imports designed to raise revenues for the government b. Prohibitive tariff – tax on imports that is high enough to prevent or to restrict imports

Trade policy •Import controls Trade quotas a. import quotas b. production quotas ( exports)

• Terms of trade -the ratio at which a country can trade domestic products for imported products

Balance of trade - the difference in value over a period of time between a country's imports and exports of goods and services. (www.merriam-webster.com)

•Trade surplus •Trade deficit

Free trade • When trade is free – unimpeded by governmentinstituted barriers-patterns of trade and trade flows result form the independent decisions of thousands of importers and exporters and millions of households and firms.

Protectionism • The practice of shielding a sector of the economy from foreign competition • E.g. tariff, export subsidies, dumping, quota • Dumping - a firm or industry sells products on the world market at prices below cost of production

Exchange rate • The ratio at which two currencies are traded for each other 1. Fixed exchange rate system 2. Managed currency system 3. Floating exchange rate system

Balance of payments •The record of a country’s transactions in goods, services and assets with the rest of the world. •The record of a country’s sources (supply) and uses (demand) of foreign exchange