Exercise 4

EXERCISE 9: FISCAL POLICY
NAME: ALLEN JO JEFFERSON B. CANDARI
COURSE/SECTION: ENTREPRENEURSHIP 1-ABE
I. ESSAY
1. Fiscal policy is the use of government spending and taxation to influence the
economy. Governments typically use fiscal policy to promote strong and
sustainable growth and reduce poverty. The role and objectives of fiscal policy
gained prominence during the recent global economic crisis, when governments
stepped in to support financial systems, jump-start growth, and mitigate the
impact of the crisis on vulnerable groups. In the communiqué following their
London summit in April 2009, leaders of the Group of 20 industrial and emerging
market countries stated that they were undertaking “unprecedented and
concerted fiscal expansion.”
2. The crowding out effect theory suggests that rising public sector spending drives
down private sector spending. To spend more, the government needs more
revenue, organization of items, wages, and enough amount of money, which it gets
through higher taxes and/or sales of Treasuries. This can reduce private sector
income, problems, confusions, and loan demand, thus decreasing spending and
borrowing.
EXERCISE 10: MONETARY POLICY
I. COMPARE AND CONTRAST
1. Money supply vs demand - While the demand of money involves the desired holding of
financial assets, the money supply is the total amount of monetary assets available in an
economy at a specific time. Data regarding money supply is recorded and published
because it affects the price level, inflation, the exchange rate, and the business cycle.
2. Money vs wealth - Income refers to the money an individual earns through work,
investments, or other sources. It's often measured over a period of time (e.g., weekly,
monthly, yearly). Wealth, on the other hand, refers to the total value of a person's
assets (such as property, investments, and cash) minus their debts
3. M1 vs M2 - M1 money supply includes those monies that are very liquid such as cash,
checkable (demand) deposits, and traveler's checks. M2 money supply is less liquid in
nature and includes M1 plus savings and time deposits, certificates of deposits, and
money market funds.
4. M3 vs M4 - M3 money supply: Known as 'broad money,' it constitutes M2 and money
market funds like mutual funds, repurchase agreements, commercial papers, etc. M4
money supply: It comprises M3 and all other least liquid assets, usually outside
commercial banks.
5. Bonds vs stock - The biggest difference between stocks and bonds is that with stocks,
you own a small portion of a company, whereas with bonds, you loan a company or
government money. Another difference is how they make money: stocks must grow in
resale value, while bonds pay fixed interest over time.
6. Nominal vs real income - In a nutshell, nominal income is the total amount of money a
person earns in a given period of time, while real income is the nominal income
adjusted for inflation. Real income is the inflation-adjusted earnings of an entity,
individual or nation. Nominal income does not consider inflation rates while calculating
an entity's or individual's earnings.
II. ANALYSIS
1. If there is a decrease in the aggregate price level, it will be associated with a leftward
shift in the money demand curve. This means that individuals in the economy will
demand less money at any given level of interest rate. If the money supply increases
(decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in
other words, the LM curve shifts right (left). That is because at any given level of output
Y, more money (less money) means a lower (higher) interest rate.
2. If there is a decrease in the aggregate price level, it will be associated with a leftward
shift in the money demand curve. This means that individuals in the economy will
demand less money at any given level of interest rate.
3. The money supply doesn't depend on the interest rate, it only depends on the central
bank. Because of this, the money supply curve is vertical at the quantity of the money
supply, not upward sloping or downward sloping.
4. The money demand curve is downward sloping because the economy's overall interest
rate affects the opportunity cost individuals face when holding money at different levels
of the interest rate. When the interest rate is low, the opportunity cost of maintaining
cash is also low.
5. Money is any object that is generally accepted as payment for goods and services and
repayment of debts in a given country or socio-economic context. The main functions of
money are distinguished as: a medium of exchange; a unit of account; a store of value;
and, occasionally, a standard of deferred payment.
III. RESEARCH
1. The quantity theory of money (QTM) also assumes that the quantity of money in an
economy has a large influence on its level of economic activity. So, a change in the
money supply results in either a change in the price levels or a change in the supply of
goods and services, or both.
2. Criticisms of Keynesian Theory of Demand for Money: Critics argue that speculative
demand oversimplifies factors affecting investment behaviour, the assumption of stable
income is unrealistic, and the theory overemphasises transactions while neglecting asset
choice. Keynes quantity theory of money fails to examine inter relationship between the
prices and money supply. - Keynes quantity theory of money suggests that price will rise
after the full employment is reached.
No, but I would explain these. Keynes reformulated the Quantity Theory of Money.
According to him, money does not directly affect the price level. Also, a change in
the quantity of money can lead to a change in the rate of interest. Further, with a
change in the rate of interest, the volume of investment can change.

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EXERCISE 9: FISCAL POLICY

NAME: ALLEN JO JEFFERSON B. CANDARI

COURSE/SECTION: ENTREPRENEURSHIP 1-ABE

EXERCISE 10: MONETARY POLICY

I. COMPARE AND CONTRAST

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