PREPARED BY :

NEERAJ BHANDARI HIRAN BISWAS

BISHAL SAPKOTA SADAM YOUSUFI

BIVEK YADAV BOTHAM

FISCAL POLICY

INTRODUCTION• FISCAL POLICY IS : GOVERNMENT SPENDING, TAXING AND

BORROWING POLICIES.

• TOOLS TO PROMOTE FULL EMPLOYMENT, PRICE STABILITY, AND RAPID ECONOMIC GROWTH.

• ACCORDING TO SAMUELSON, “IT IS CONCERNED WITH ALL THOSE ACTIVITIES WHICH ARE ADOPTED BY THE GOVERNMENT TO COLLECT REVENUES AND MAKE THE EXPENDITURES SO THAT ECONOMIC STABILITY COULD BE ATTAINED WITHOUT INFLATION AND DEFLATION”

OBJECTIVES OF FISCAL POLICY• Development by effective Mobilization of Resources

• Efficient allocation of Financial Resources

• Price Stability and Control of Inflation

• Employment Generation

• Increasing National Income

• Development of Infrastructure

• Foreign Exchange Earnings

TYPES OF FISCAL POLICY1. Expansionary Fiscal Policy

• Expansionary fiscal policy uses increased government spending, reduced taxes or a combination of the two.

• The chief objective of a fiscal expansion is to increase aggregate demand for goods and services across the economy, as well as to reduce unemployment.

@ Expert Insight

Expansionary fiscal policy has a multiplier effect, in which each dollar spent by government generates additional demand across the economy, according to Professor Gregory Mankiw , a Harvard economist and former White House adviser. 

2. CONTRACTIONARY FISCAL POLICY

• When government policy-makers cut spending or increase taxes, they engage in contractionary fiscal policy.

• Governments may enact contractionary measures to slow an economic expansion and prevent inflation.

@ Considerations

Economic fluctuations independent of policy actions by government often affect the level of tax revenues, forcing elected officials to alter fiscal policy. For example, economic recessions reduce output and employment, resulting in reduced revenue for government coffers. This often forces policy makers to consider contractionary measures, such as increasing revenues by raising taxes or cutting government spending.

FISCAL MEASURES

1. Taxes/ Taxation Policies

These are involuntary payments from the household sector to the government sector. Taxes are the primary source of revenue used by government to finance government spending. Taxes affect the amount of disposable income available for consumption and saving. As such, any change in taxes indirectly affects aggregate expenditures and the macro economy through consumption expenditures and investment expenditures (via saving).

2. Public expenditure / Government Expenditure Policy

• It refers to government expenditure on public or final goods and services.

• Public expenditure is an important component of aggregate demand. Therefore, excess demand can be corrected by reducing government expenditure. Reduction in government expenditure also leads to a decline in the volume of national income due to the backward operation of investment multiplier. Reduction in national income leads to a decline in aggregate demand and fall in the price level.

4. Public borrowing:

Like tax and public expenditure, public borrowing is also an important anti – inflationary instrument. Government of a country should resort to borrowing from the non-bank public to keep less money in their hands for correcting the state of excess demand and inflationary situation. On the other hand, to correct deficient demand, government should reduce borrowing from the general public so that purchasing power in the hands of the people is not reduced. Rather, government should repay the past loans to the people to increase their disposable income.

4. Deficit financing Besides the above fiscal measures,

government should resort to deficit financing to correct deficient demand. Deficit financing is a technique of financing a deficit budget by ( I ) printing notes, & ( ii ) borrowing from the central bank or drawing down the cash balances on part of the government from the central bank. In any case, deficit financing makes an addition to the total money supply of the country and can correct deficient demand. However, deficit financing beyond a limit may produced inflationary situation in a country. Therefore, deficit financing must be kept within a limit and should be used with caution and care.

BUDGET• A budget is a statement of expenditures and receipts. If

expenditures exceed receipts, then a budget deficit occurs.

• If receipts exceed expenditures, then a budget surplus occurs. While households, businesses, and other entities have budgets, fiscal policy is most concerned with government budgets.

• In particular, fiscal policy, especially that undertaken by the federal government, is commonly evaluated in terms of budget deficits and surpluses.

The Budget Deficit

• A government’s budget deficit is the difference between what it spends (G) and what it collects in taxes (T) in a given period:

BUDGET DEFICIT = G - T

FUNDING THE DEFICIT

DEFICIT=Expenditure > Revenue

CONSUMING THE SURPLUS

SURPLUS=Revenue > Expenditure

FULL EMPLOYMENT GAPS Fiscal policy is used to address business-cycle

instability that gives rise to the problems of unemployment and inflation, that is, to close recessionary gaps and inflationary gaps.

• Recessionary Gap: A recessionary gap exists if the existing level of aggregate production is less than what would be produced with the full employment of resources. This gap arises during a business-cycle contraction and typically gives rise to higher rates of unemployment.

• Inflationary Gap: An inflationary gap exists if the existing level of aggregate production is greater than what would be produced with the full employment of resources. This gap typically arises during the latter stages a business-cycle expansion and typically gives rise to higher rates of inflation

• Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

• Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

• Central Bank (e.g. U.S. Federal Reserve or European Central Bank)

• Interest rates; reserve requirements; currency peg; discount window; quantitative easing; open market operations; signaling

• Fiscal policy is the use of government expenditure and revenue collection to influence the economy.

• Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

• Government (e.g. U.S. Congress, Treasury Secretary)

• Taxes; amount of government spending

FISCAL POLICY MONETARY POLICY

THANK YOU !!

PREPARED BY :

NEERAJ BHANDARI HIRAN BISWAS

BISHAL SAPKOTA SADAM YOUSUFI

BIVEK YADAV BOTHAM