Fiscal policy

Fiscal policy is an instrument of demand management which is used to influence the level of economic activity in an economy through the control of taxation and government expenditure.

The government can use a number of taxation measures to control aggre­gate demand or spending: direct taxes on individuals (income tax) and com­panies (corporation tax) can be increased if spending has to be reduced, for example, to control inflation. Spending can also be reduced by increasing in­direct taxes: an increase in the VAT on all products or excise duties on partic­ular products such as petrol and cigarettes will result in lower purchasing power.

The government can change its own expenditure to affect spending levels as well: a cut in purchases of products or capital investment by the govern­ment can reduce total spending in the economy.

If the government is to increase spending, it creates a budget deficit, re­ducing taxation and increasing its expenditure.

A decrease in government spending and an increase in taxes (a withdrawal from the circular flow of national income) reduces aggregate demand to avoid (избегать) inflation. By contrast, an increase in government spending and / or decrease in taxes — an injection (денежное вливание) into the circular flow of national income) stimulates aggregate demand and creates additional jobs to avoid unemployment.

In practice, however, the effectiveness of fiscal policy can be reduced by a number of problems. Taxation rate changes, particularly changes in income tax, take time to make; considerable proportion of government expenditure on, for example, schools, roads, hospitals and defense cannot easily be changed without lengthy political lobbying.

Unit 13: money and its functions

Text 1: Read and translate the text and find in the text:

Money and its functions

Money has four functions: a medium of exchange or means of payment, a store of value, a unit of account and a standard of deferred payment. When used as a medium of exchange, money is considered to be distinguished from other assets.

Money as the medium of exchange is believed to be used in one half of almost all exchange. Workers exchange labour for money, people buy or sell goods in exchange for money as well.

People do not accept money to consume it directly but because it can subsequently be used to buy things, they wish to consume. To see the advan­tages of a medium of exchange, imagine a barter economy, that is, an econ­omy having no medium of exchange. Goods are traded directly or swapped for other goods. The seller and the buyer each must want something the other has to offer. Trading is very expensive. People spend a lot of time and effort finding others with whom they can make swaps. Nowadays, there exist ac­tually no purely barter economies, but economies nearer to or farther from the barter type. The closer is the economy to the barter type, the more waste­ful it is.

Serving as a medium of exchange is presumed to have for centuries been an essential function of money.

The unit of account is the unit in which prices are quoted and accounts are kept. In Britain, for instance, prices are quoted in pounds sterling; in France, in French francs. It is usually convenient to use the same unit to measure the medium of exchange as well as to quote prices and keep ac­counts in. However, there may be exceptions. During the rapid German in­flation of 1922-23 when prices in marks were changing very quickly, German shopkeepers found it more convenient to use US dollars as the unit of ac­count. Prices were quoted in dollars though payment was made in marks. The same goes for Russia and other post-communist economies who used the US dollar as a unit of account, keeping their national currencies as means of actual payment. The higher is the inflation rate, the greater is the probability of introducing a temporary unit of account alongside the existing units for measuring medium of exchange.

Money is a store of value, for it can be used to make purchases in future. For money to be accepted in exchange, it has to be a store of value. Unless suitable for buying goods with tomorrow, money will not be accepted as pay­ments for the goods supplied today. But money is neither the only nor neces­sarily the best store of value. Houses, stamp collections, and interest-bearing bank accounts all serve as stores of value.

Finally, money serves as a standard of deferred payment or a unit of ac­count over time. When money is borrowed, the amount to be repaid next year is measured in units of national currency, pounds of sterling for the United Kingdom, for example. Although convenient, this is not an essential function of money. UK citizens can get bank loans specifying in dollars the amount that must be repaid next year.

Thus, the key feature of money is its use as a medium of exchange. For money to be used successfully as a means of exchange, it must be a store of value as well. And it is usually, though not always, convenient to make money the unit of account and standard of deferred payment.