Distinguishing Between Fiscal and Monetary Policy Doc

Economics

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
1............................................................................................................................................................3
a. Defining.......................................................................................................................................3
b. Distinguishing between movement along and shift of demand function with proper diagram.. 3
c. Calculation of Price elasticity of demand. ..................................................................................5
2. Comparing market structures of monopoly and perfect competition with the help of diagram. .....6
3............................................................................................................................................................7
a. Distinguishing between Fiscal and Monetary policy. Which one is carried out by the European
Central Bank?..................................................................................................................................7
b.......................................................................................................................................................8
1.......................................................................................................................................................8
4. Inflation causes & measures adopted by government for controlling inflation type........................8
CONCLUSION....................................................................................................................................8
REFERENCES.....................................................................................................................................9

INTRODUCTION
Economics is defined as study of terms such as production, manufacturing, distribution,
consumption of different types of goods and services related to a particular business firm which are
having capacity of influencing market demand and forces. The present report will define meaning
of terms demand, supply and market. Also, explanation will be made related to shift and movement
in demand function. Further, description about monopoly and perfect competition structure will be
provided. At last, focus will be made on specifying difference between fiscal and monetary policy.
MAIN BODY
1.
a. Defining
1. Demand - As per the economic principle, demand is known as consumer willingness, desire
as well as ability to make purchase or consumption of particular good and service as per
needs with the willingness of consumer to pay for it. Demand for a specific good or service
will decrease with increase in its price remaining other factors constant.
2. Supply – It refers to goods and services amount which supplier is willing to offer to
different consumer at given level of price in a specific time period (Cooter and Ulen, 2016).
Supply function depends on price of good and services i.e. with low price supply level also
decreases and vice versa.
3. Market – A place where both the buyers and suppliers enters into transaction for
exchanging goods, services and information of any type. It allows distributors as well as
sellers to sell product or service and buyers, consumers buy with exchange of price as
defined by seller.
b. Distinguishing between movement along and shift of demand function with proper diagram.
Normal goods are those goods for which demand increases with the increase in consume
income level for example wheat, rice etc. The rate at which demand increases is slower than the rate
at which income of consumer increases (De Grauwe, 2018).
Movement along demand curve happens when changes takes place in quantity demanded for a
particular good or service as a result of change in the level of price remaining other factors constant
such as taste and preferences, income of consumers etc.
For example -

Price of
commodity
(in ₤)
Quantity
demanded (in
units)
Consumer
Income (in ₤)
20 5 40
15 10 40
10 20 40
5 30 40
Interpretation – As per the table mentioned above, it can be concluded that with change in
price of commodity from ₤20 to ₤5, there has been a drastic change in the level of quantity
demanded for that product with consumer income level remaining same for all level.
Shift of Demand function is a situation in which change in quantity demanded of specific
product at every price because of changes taking place in more than one factors such as consumer
income, taste, price of other goods etc. which required to remain constant results in shifting of
demand curve.
For example -
1 2 3 4
0
5
10
15
20
25
30
35
40
45
Price of commodity (in ₤)
Linear (Price of commodity (in
₤))
Quantity demanded
Linear (Quantity demanded)
Consumer Income (in ₤)
Linear (Consumer Income (in
₤))

Interpretation – From the above figure, it can be notice that by having change in income
level of consumer brings shift in demand curve with change in the price of commodity. The shift in
above demand curve is on right side which depicts that there has been an increase in the willingness
level of consumer to make purchase of commodity at all price level.
c. Calculation of Price elasticity of demand.
Price elasticity of demand is responsiveness of quantity demanded of good and services to
changes taking place in price level with other things remaining constant.

Price of Good X (in €) Quantity demanded (in
units)
150 1000
200 800
Formula – Percentage change in Quantity demanded (∆Q/Q)
Percentage change in Price (∆P/P)
Percentage change in Quantity demanded (∆Q/Q) = (800-1000)/(800+1000) = -0.111
Percentage change in Price (∆P/P) = (200-150)/(200+150) = 0.143
Price elasticity of demand = -0.111/0.143
Price elasticity of demand = -0.776
Interpretation - The elasticity calculated for commodity X is -0.776 which indicates that
demand decreases with increase in prices.
2. Comparing market structures of monopoly and perfect competition with the help of
diagram.
Monopoly market is a place where there is a single seller engaged in business of selling a
unique product with no competition and close substitute in the market place having power to set
price accordingly (Pigou, 2017). For example – Microsoft
Perfect competition market is having large number of buyers and sellers engaged in
exchange function of homogeneous product with perfect market knowledge of the market.
Competition is very high in this market. For example – Pen

Basis Monopoly market Perfect competition market
1. Price Is a price market giving right to set
price accordingly.
Seller is price taker.
2. Abnormal profit Seller is capable of making abnormal
profit in short period.
Is not able to earn abnormal profit
in very short time frame.
3. Price
discrimination
Seller charges different prices from
different customers resulting in price
discrimination.
Not possible in perfect
competition to charge different
prices because of homogeneous
products.
4. Demand Curve Downward sloping Perfectly elastic
3.
a. Distinguishing between Fiscal and Monetary policy. Which one is carried out by the European
Central Bank?
Fiscal policy is known as effort made by government so as to achieve specific macro
economic goals of policy by making changes in volume and revenue - expenditure pattern and
balance in between them.
Monetary policy is designed to regulate supply of money flow and ensuring credit
availability in the economy (Lewandowski, 2016). The central bank of country is having power to
formulate and implement monetary policy of the economy.
Basis Fiscal Policy Monetary Policy

1. Objective To maintain economic as well
as price stability.
To attain stability in price level
& exchange rate.
2. Focus To promote, introduce
substitution of import function.
To eradicate negative impact on
business cycle of the economy.
3. Importance Expanding public spending
thereby reducing tax level.
To overcome depression level.
The European Central Bank focus is on implementation of monetary policy thereby
achieving price stability, assisting in economic growth, creation of employment opportunities as
well.
b.
1.
Y = C+I
where, I = 600 Crore
C = 1500+.44
I = 600
Y = 1500+0.44+600
(Y-.4Y) =1500+600
Y(1-.4) = 2100
.3Y = 2100
Y= 2100/.3 = 7000
4. Inflation causes & measures adopted by government for controlling inflation type.
Inflation is defined as a quantitative measure depicting rate at which the average level of
price associated with selected product and services in economy increases with the change in time
period. For controlling inflation in the economy, government seeks following measures:
1. Monetary measures – By formulating policies in respect of monetary terms it can control
all the economic activities taking place in the country. It includes risk in bank rate, having
direct control on facility of credit creation etc.
2. Fiscal measures – Government revenue and expenditure are two main components with the

help of which inflation is controlled i.e. either by reducing private spending, declining
government expenditure or using both means (Bocken and et.al., 2016).
3. Price control – By increasing the level of price for a short run period, government can make
control over inflation pressure and ensures economic growth of the country.
CONCLUSION
From the above report it can be concluded that with the help of market forces, demand of a
particular product or services can be change. Study of market helps in determining fluctuation in
demand and supply function & curve. By formulating strategies, every company can capture market
share as well as can increase its customer base.