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Fiscal policy has powerful effects upon economic activity led to the Keynesian approach to macroeconomic policy which is the active use of government action to moderate business cycles.

Keynesian macroeconomics policies are

  1. First, the explicit dedication of macroeconomic policy instruments to real economic goals in particular full employment and real growth of National income.
  2. Second, Keynesian demand management is activist.
  3. Third, Keynesian has wished to put both fiscal and monetary policies in consistent and coordinated harness in the pursuit of macroeconomic objectives.

Why we give money to its value?


  • Money has value because of its general acceptability.
  • We accept paper dollars because we know that other people will accept dollars later when we try to spend them.
  • Money has value to people because it is widely accepted in exchange for other goods that are valuable.

Money and the price level

Question: Do changes in the money supply affects the price level in the economy?

Answer: classical economists beloved so their position was based on the equation of exchange and the simple quantity theory of money.

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Definition of Money

Money is anything that serves as a commonly accepted medium of exchange or economic transactions.

Description of money’s evolution:

Some years since, Zelie a singer of the theatre Lyrique at Paris, took part in the Society Islands. She got three pigs, twenty-three turkeys (large bird), forty-four chickens, five thousand cocoanuts, besides considerable quantities of bananas, lemons and oranges. That time it became necessary to feed the pigs and poultry with the fruits.

This example describes barter (exchange goods for other goods without using money). Exchange through barter contrasts with exchange through money. Although barter is better than no trade at all.

As economics develop people no longer barter one good for another instead they sell goods for money and then use money to buy other goods they wish to have.

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A nation has two major kinds of policies fiscal policy monetary policy that can be used to pursue its macroeconomic goals

1. Fiscal policy:  Fiscal policy consists of government expenditure and taxation. we know it from the definition of fiscal policy. Government expenditures come into two distinct forms – government purchases which comprise spending on goods and services such as purchases of tanks, construction of roads, salaries for judges etc. and government transfer payments which increases the incomes of targeted groups such as the elderly or the unemployed. Government expenditure influences the relative size of collective spending and private consumption.

The other part of fiscal policy refers to the taxation. Taxation affect people’s income, subtracts from incomes, reduces private spending and affects private saving. In addition it affects investment and potential output. It affects the prices of goods and factors of production and thereby affects incentives and behavior.

Fiscal policy is primarily used to affect long-term economic growth through it impact on national saving and investment, it is also used to stimulate in deep or sharp recessions.

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 Definition of economics: Economics comes from Greek word “Oikonomia”. Adam smith explained the definition of economics in his famous “Wealth of Nations” that “Economics is a science which enquires the cause of wealth.

Prof. Marshall said, “A study of man’s action in the ordinary business of life.”

Difference between microeconomics and macroeconomics

The difference between micro and macro economics are below


  • Microeconomics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries, and individual commodities.
  • Micro means very small or millionth part.
  • The subject or example of microeconomics is about person, an investor, a producer.
  • As it analyzes individually it provides a partial concept or partial figure of a country.
  • Micro economics is concerned with the individual entities.

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The subject of economics is divided into two classifications

  1. Positive economics
  2. Normative economics


These two functions are basics of economics. Learning economics starts with these two subjects. Description of positive economics and normative economics are below


  1. Positive economics: What is positive economics? Positive economics is that economics where the problems of a country and the possible solutions are described based on real component which has occurred, which can be occurred. Positive economics discusses inquiries and finds its reason. It is based on information so that positive economics is called reality based economics; positive economics examples – positive economics deals with such questions as who do doctors earn more that janitors? Did the North American free trade agreement (NAFTA) raise or lower the incomes of most Americans?

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