The government possesses two major fiscal tools for influencing the economy. These tools can be divided into spending tools and revenue tools. Spending tools refer to the overall government spending. On the other hand, revenue tools refer to taxes collected…

S­­­ Fiscal policy refers to all the methods used by a government to influence the economy through tax rates and government expenditures. For example, a government may decide to reduce taxes. These moves should, in theory, stimulate the economy and…

The monetary transmission mechanism is the process where general economic conditions and asset prices are affected due to the monetary policy decisions. It occurs through interest rate channels that influence the costs of borrowing, the levels of investment, and aggregate…

The sustainability of economic growth is measured by the rate of increase in productive capacity and/or by the potential gross domestic product of the economy. Sources of Economic Growth The growth accounting equation emphasizes the main factors that determine growth….

Input Growth Already, we are well aware that the productive capacity and potential GDP of an economy increase due to the following two reasons: the accumulation of inputs such as capital, raw materials, and labor used in the production process;…

The money creation process is very helpful in understanding the role of money in the economy. The strength of money creation is influenced by the amount kept in the bank as a reserve for meeting the withdrawal requests of customers….

Supply of Money Just like any other market, demand and supply of money will interact to produce an equilibrium price of money. The graph below shows the supply and demand for money. The money supply (MS – M/P) is vertical…

The Fisher effect was developed by an economist named Irvin Fisher. This effect is directly connected to the neutrality of money. It states that in an economy, the real interest rate is stable and that changes in nominal interest rates…

Objectives of Central Banks The main objective of a central bank is to ensure financial stability. Depending on the country, central banks might have other objectives such as controlling inflation, unemployment, interest rates, or exchange rates. However, all these objectives…

Expected Inflation Expected inflation is the inflation that economic agents anticipate in the future. Expected inflation leads to “menu cost,” which refers to a scenario in which businesses change their advertised prices constantly. The constant fluctuation of prices is due…