chapter  8
25 Pages


This chapter describes fiscal policy and monetary policy, the two macroeconomic policies that governments employ to affect domestic output. Fiscal policy entails using changes in government taxation and/or government spending at the national level to affect the level of economic activity. Governments now tend to use monetary and fiscal policy to focus on a country's internal balance. The J-curve illustrates the effect of a currency depreciation on the current account. The chapter analyzes the effects of both fiscal policy and monetary policy on the exchange rate, the current account balance, interest rates, and short-run capital flows within an environment of floating exchange rates. It shows how a country's government tends to use both policies to influence macroeconomic variables such as the growth rate of real GDP, the price level, the exchange rate, or the current account, and presents the effects of different policy mixes on the domestic economy.