Money, Banking, and Economic Policy: A Comprehensive Analysis
Money and Banking
Money serves three primary functions: a medium of exchange, a store of value, and a unit of account. The relationship between money demanded and purchasing power is crucial. Loss of purchasing power due to inflation leads to a higher demand for money to maintain consumption levels.
Monetary aggregates group different kinds of money, allowing for a comprehensive study of the money circulating in an economy.
Not all banks in the EU participate in the Eurosystem. Only central banks of countries using the euro are part of it.
Open market operations are a key policy instrument because they determine the price and amount of money in circulation. The ECB uses these operations to manage liquidity.
Central banks in the EU inject or withdraw liquidity through the granting or absorption of deposits.
A fundamental aspect of money is its role as a means of payment.
When granting a loan, banks consider factors like interest rates and loan duration.
Bank money exists in various forms, including savings and fixed-term deposits.
A key microeconomic variable affecting the reserve requirement is the amount of money in circulation. Increasing this coefficient requires banks to hold a larger portion of inactive deposits.
Monetary and Fiscal Policy
Price stability is the main objective of monetary policy because inflation in one country can affect others.
Aggregate supply and demand determine the amount of goods and services demanded by a country’s economic agents.
Public Spending and Taxes
- Current expenses fund public services like health, education, and defense. Investment costs maintain and expand the country’s productive capacity. Transfers are payments to individuals, while subsidies are directed towards businesses.
- The phrase “Economic growth today may be tomorrow’s hunger” highlights the importance of sustainable economic growth, ensuring resources for the future.
- The State Budget (PGE) details estimated expenditure and revenue for the year, aligning with the state’s economic plan and objectives. Tax revenues are crucial, often comprising half of the budget. Taxes can be classified based on whether the taxpayer receives something in return.
- Structural policies aim to promote long-term economic progress.
- Direct taxes are levied on individuals or companies based on profit or asset ownership. Indirect taxes are paid when purchasing goods or services. Direct taxes are more effective for income redistribution as they reflect the payer’s economic situation.
- Budget deficits are considered a cyclical problem because they are temporary, occurring during recessionary phases. Governments may incur debt to stimulate the economy.
- The EU’s Stability Pact establishes common budgetary criteria for eurozone countries to prevent deficits in one country from negatively impacting others.
- The introduction of the euro posed a challenge for financing deficits because eurozone countries lost the ability to independently control their money supply.
- Support from groups like unions is crucial for economic policy planning due to their broad social and economic influence. Negotiations with these stakeholders are often necessary for measures like wage freezes or tax increases.
- Actual expenditure involves the state receiving compensation for money spent, while transfers involve the state redistributing income. An example of actual expenditure is purchasing goods and services. An example of a transfer is social security payments.
- Privatization is the transfer of company ownership from the public sector to private entities. Examples include the privatization of companies like Iberia, Telefonica, and Endesa.
- Keynesians support using deficits to stimulate the economy, while neoliberals criticize this approach.
- A persistent budget deficit can hinder economic growth by diverting resources towards paying past debts instead of current needs.