Economics Notes: Fiscal and Monetary Policy
1. Fiscal Policy
Government use of spending and taxation to influence the economy.
Expansionary Fiscal Policy:
oIncreases AD (e.g., tax cuts, more public spending)
oUsed during recession
Contractionary Fiscal Policy:
oDecreases AD (e.g., higher taxes, less spending)
oUsed to combat inflation
2. Budget Outcomes
Surplus: Revenue > Spending
Deficit: Spending > Revenue
Balanced: Revenue = Spending
3. Monetary Policy
Central bank controls money supply and interest rates
Main Tool: Interest rates
Expansionary Monetary Policy:
oLower interest rates more borrowing/spending→
oIncreases AD
Contractionary Monetary Policy:
oHigher interest rates less borrowing/spending→
oReduces inflation
4. Quantitative Easing (QE)
Central bank buys financial assets to increase money supply
Used when interest rates are near zero
