FISCAL & MONETARY POLICY

Fiscal Policy- is the use of government spending and taxes to influence the nations
spending, employment and price level. (Tucker 2007 p. 527)
- The manipulation of the national government budget to attain price stability,
relatively full employment, and satisfactory rate of economic growth.

Discretionary Fiscal Policy - as the deliberate use of change in government spending

or taxes to alter aggregate demand and stabilize the economy.

TWO TYPES OF DISCRETIONARY FISCAL POLICY

1. Expansionary Fiscal Policy the government increase in government spending,
decrease taxes or increase government spending and taxes equally.
2. Contractionary Fiscal Policy decrease government spending, increase taxes or
decrease government spending and taxes equally.

Aggregate Demand- total demand for final goods and services in an economy at a
given time.
Public spending/expenditures- money expended by Govt to pay for defense,
development project, education, health, infrastructure , law and order maintenance etc.
It is supported by Taxation.
Tax involuntary fee levied on individual and corporations that is enforced by
a government entity.
Personal Income Tax- direct tax levied on income of a person
Corporate Income Tax- assessment levied by a government on the profits of company.

Deficit Spending - was first advocated by John Maynard Keynes.

Budget Deficit spending exceeds revenue.
Budget Surplus revenue exceeds current expenditures.
Budget Balance inflows equal the outflows.

Monetary Policy influencing the economy through changes in the banking systems
reserves that affect the money supply and credit availability in the economy.

MONETARY FRAMEWORKS
1. Monetary Aggregate Targeting approach to monetary policy undertaken by
central banks that aim to influence the behaviour of monetary aggregates.
2. Interest Rate Targeting actions of central bank that affects the targeted level
of interest rate.
Interest Rate refers to the payment expressed per year made by the borrower
to a lender in exchange for a loan.
3. Inflation Targeting announcement of an explicit inflation target that the central
bank promises to achieve over a given time period.

TYPES OF MONETARY POLICY

1. Expansionary Monetary Policy policy setting that intends to increase the level
of money supply in the economy and will result in higher inflation path in the
economy.
2. Contractionary Monetary Policy that intends to decrease the level of money
supply which will result in lower inflation path.

COMPOSITION OF MONEY SUPPLY

M1 Currency in circulation and peso demand deposits.
M2 Broad money (M1 plus peso savings and time deposits)
M3 Broad money liabilities ( M2 plus peso deposit substitutes such as promissory notes
and commercial papers.
M4 M3 transferable and other deposits in foreign currency.

INSTRUMENTS USED BY THE BSP

1. Raising (reducing) the BSPs policy interest rates.
2. Increasing (decreasing) the reserve requirement.
3. Encouraging (discouraging) deposits in the SDA facility by banks and trust entities
of BSP-supervised financial institutions.
4. Increasing (decreasing) its rediscount rate on loans extended to banking
institutions on a short-term basis against eligible collaterals of banks borrowers.
5. Outright sales of the BSPs holdings of governments securities.