State Intervention, Fiscal Policy and Monetary Effects

State Intervention and Fiscal Policy

Keynesians: Yes — because they assume that the free economy does not always reach full use of productive resources. They recommend state intervention through monetary and fiscal policies, especially the latter, with the objective of stabilizing the economy.

Monetarists: Rely on the free play of market forces; state intervention should be minimized.

Tax Policy

Government decisions about spending and taxes (income tax, VAT, etc.).

Types

• Expansionary (previously noted as "greedy"): spending > taxes to raise aggregate demand.
• Restrictive: increase taxes or reduce spending to lower aggregate demand.

Public Budget and Economic Sector

Stances (I < G; deficit);

• Classics: Limit public spending.
• Keynesians: Increase demand and public expenditure, financed by taxes as needed.
• Treasury policy: To stabilize the economy through public works, public employment projects and transfers.
• Disadvantages: Projects may take many years before they are held; they can be slow to implement.
• Automatic stabilizers: Reduce the strength of expansions and recessions without discretionary measures (pensions, unemployment benefits, etc.).

State Budget

Prepared by the executive powers and approved by the legislature. It collects all revenue and expenses of the State.

Components

• All ministerial expenses and Social Security (Ministerio de Trabajo): pensions and healthcare.
• Contents: expenses, income, and public goods and social services provided by the State.

Public Expenditure

• By target:
  • Current (e.g., civil servant salaries).
  • Investment expenses (e.g., roads, hospitals).
  • Other (e.g., unemployment benefits).

Revenue

• Tax: income tax, VAT, etc.
• Non-tax: fees, lotteries, and other non-tax revenues.

Ordinary and Extraordinary

Ordinary (normal revenues and expenditures) and extraordinary (e.g., public debt issuance).

Lesson 11: Money

Money?

Goods that serve as money (historically gold and silver): durable, portable, divisible, homogeneous, limited supply.

• Metallic money: gold and silver.
• Paper money (originally convertible to gold).
• Current financial system: checks and credit cards, cash.
• Amount of money: physical currency (coins and banknotes) + bank deposits.

Topic 12: Monetary Policy

Restrictive Policy (Peak)

Restrictive monetary policy increases interest rates, reducing demand. Effects: lower consumer spending (households), lower investment (businesses), and reduced public expenditure growth.

Expansionary Policy (Recession)

Expansionary monetary policy lowers interest rates and increases the money supply. Effects: higher consumer spending, increased business investment, more public investment and expenditure, higher production, employment and prices.

Monetary Policy and Inflation

If incomes increase, the demand curve shifts to the right, which can raise prices depending on supply conditions.

Theories Explaining Inflation

• Classical: Inflation occurs because increasing the amount of money raises production prices (money supply driven).
• Keynesians: If an increase in the quantity of money is matched by increases in production and services, inflation may not occur.

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