Governments or central banks can also use monetary policy - changing interest rates and the level of the money supply - to influence the level of economic activity.
They can boost or increase economic activity if the economy is in a downturn by reducing interest rates and allowing the rate of growth of the money supply to increase. Alternatively, if the economy is growing too fast and causing inflation, they can slow it down by increasing interest rates and reducing the rate of growth of the money supply.
The main reason for having an independent central bank is to prevent governments from creating a political business cycle - a cycle that will be at a high point at the time of the next election. Governments can do this by beginning their periods of office with a couple of years of policies designed to stop the economy front growing, followed by tax cuts and monetary expansion in the two years before the next election. This policy, sometimes called boom and bust, helps the government get re-elected but is no good for economic stability. An independent central bank makes this less likely to happen.
Ex. 1Match up the words in A and B.
A: government, business, direct, money, central, tax, monetary;
B: cycle, tax, bank, expenditure, cuts, expansion, supply.
Ex. 2Match up the words and their definitions.
1 boom
2 taxation
3 monetary policy
4 reflation
5 slump
6 deflation
7 fiscal policy
A a government's plan for how much money to borrow and to collect in taxes, and how best to spend it best
B actions taken by governments or central banks to control the amount of money in an economy by changing the interest rate
C the system by which a government takes money from people and spends it on things such as education, health, and defence
D the process of improving the economy of a country by increasing the amount of money that people are earning and
E the reduction in economic activity that leads to lower levels of output, employment, investment, trade, profits, and prices
F a period of increased economic activity and growth
G a period of quick reduction to a much lower level of activity
Ex. 3Match up 2 parts of the sentences.
1 If the government thinks the economy is contracting too much.
2 Fiscal policy involves
3 If there isn't an independent central bank, governments can
4 If the government thinks the economy is growing too quickly,
5 Monetary policy involves
A interest rates and the money supply.
B it can raise tax rates and cut its expenditure.
C manipulate the business cycle to their own advantage.
D it can cut taxes and increase its spending.
E taxation and government spending.
Ex. 4Translate the text.
Ex. 5Comment on the following.
a) Has the economy in your country expanded or contracted over the past 4 years? b) What do you think were the causes of these changes?
Ex. 6 Make an oral report on fiscal or monetary policy.