Comm 295 Week 8 Dq - Fiscal and Monetary Policy

Fiscal and Monetary Policies

Fiscal Policy are the changes in government spending and taxation that are tasked to achieve full employment and a stable price level. It can either be discretionary, if changes in government spending and taxes are at the option of the government, or non discretionary, in which these changes occur automatically or independently. There are 2 types of fiscal policy, expansionary fiscal policy and contractionary fiscal policy. An expansionary fiscal policy is used when a recession occurs. The policy’s goal is to increase the aggregate demand which would then increase the real GDP by increasing government spending, reducing taxes, or both. A contractionary fiscal policy is used when a demand-pull inflation occurs. The policy’s goal is to decrease aggregate demand which would then lower or eliminate inflation by reducing government spending, increasing taxes, or both; a complete opposite of the expansionary fiscal policy. The Monetary Policy on the other is the process by which the monetary authority of a country, or in this case the Bank of Canada, controls the supply of money. This often targets inflation rate or interest rate to ensure price stability and trust in the currency. There are 2 types of monetary policy, the expansionary and the restrictive monetary policy. The problem during an expansionary monetary policy is unemployment and recession. When that occurs, the bank buys bonds and lowers the bank rate, increase excess cash reserves, overnight rate falls, money supply rises, interest rate falls, investment spending increases, aggregate demand increases, and therefore, real GDP rises; the opposite goes for the restrictive monetary policy.

Perfect Competition

A perfect competition is when there are many small firms who have the freedom to enter or exit the market in which they also face the same costs. The products of these firms are homogeneous which also means that they are price takers and have no control over the price...