Economic Fundamentals: Welfare State, Fiscal Policy, Money

The Welfare State: Pillars and Purpose

The Welfare State's core pillars are based on:

• Social security coverage and healthcare benefits.
• Redistribution of income.
• Eligibility for financial assistance in difficult situations, such as widowhood or unemployment.

Microeconomic Goals and Policy Instruments

Objectives:

• Economic efficiency
• Equity

Policy Instruments:

• Subsidies
• Tax breaks for companies
• Price controls
• Regulation of surpluses

Expansionary Fiscal Policy

Expansionary fiscal policy aims to increase aggregate demand. When new demands emerge, the aggregate demand curve shifts to the right. This policy is often employed during economic recessions to stimulate the economy and boost employment levels.

Mechanisms:

1. Increased Government Expenditure (G): An increase in government spending leads to higher aggregate demand (DA), resulting in increased output (Q), more jobs, and potentially higher prices.
2. Increased Transfers (T): Higher government transfers boost consumption and investment, leading to increased aggregate demand (DA), which in turn results in higher output (Q), more jobs, and potentially higher prices.
3. Decreased Taxes (T): Lower taxes increase consumption (C) and investment, leading to higher aggregate demand (DA), which results in increased output (Q), more jobs, and potentially higher prices.

Money: Functions and Supply

What is Money?

Money is anything that members of a community are willing to accept as payment for goods, services, and debts.

Functions of Money

Money serves several key functions:

• Unit of Account: It acts as a standard unit for measuring value.
• Store of Value: It allows economic agents to preserve their wealth over time.
• Medium of Exchange: It facilitates transactions, as payments and charges are generally specified and carried out in cash or its equivalents.

Restrictive Fiscal Policy

Restrictive fiscal policy aims to decrease aggregate demand. It is often used to combat inflation or reduce budget deficits.

Mechanisms:

1. Decreased Government Expenditure (G): A reduction in government spending leads to lower aggregate demand (DA), resulting in decreased output (Q) and potentially higher unemployment rates.
2. Increased Taxes (T): Higher taxes reduce consumption (C) and investment (I), leading to lower aggregate demand (DA), which in turn results in decreased output (Q) and potentially higher unemployment rates.
3. Decreased Transfers (T): Lower transfers reduce consumption (C), leading to lower aggregate demand (DA), which results in decreased output (Q), potentially higher unemployment, and lower prices.

Understanding Money Supply

Money supply refers to the total amount of money available to economic agents for carrying out transactions. It is the sum of cash in circulation (EC) and deposits (D), expressed as: OM = EC + D

Measures of Money Supply:

• M1: Includes cash in circulation and demand deposits.
• M2: M1 plus deposits in savings accounts and time deposits.
• M3: M2 plus long-term deposits.
• ALP (Liquid Assets in the Hands of the Public): M3 plus Other Liquid Assets (OAL), which are investments by individuals in businesses or the state that can be readily exchanged for cash.

Key Financial Institutions

Banks

Banks are organizations whose primary economic activity involves carrying out financial operations. These operations generally fall into two categories:

• Debit Operations: These involve the uptake of money through opening bank deposits or the placement of financial products and investment funds.
• Active Operations: The most common active operations are loans and credits extended to individuals and businesses.

Savings Banks

Savings banks are characterized by their non-profit nature and their beneficial character. While they are governed by rules different from commercial banks, they tend to operate in a similar manner.