Fiscal and Monetary Policy

Abstract

Changes in either tax rates or government spending, whether explicitly designed to control the macroeconomy or automatic changes with the same intent, are to be known as fiscal policy; similarly changes in the money stock are known as monetary policy. An implication of the theory developed in Chap. 4 is that government spending, tax rates and the money supply can all be effective tools for the control of aggregate real output and the rate of inflation. In that chapter we derive theoretical expressions for the balanced budget government spending multiplier and the money multiplier. In the simplified model of Chap. 4 these two types of policy are inherently dependent. In this chapter we return to a more general version of stabilization policy, as in Chap. 2, in which fiscal and monetary policies may be conceptually separate.