Tiêu đề Chapter 7 ( Unit 4 ).pdf ✅

UNIT – 4: FISCAL POLICY ▪ Fiscal policy is the deliberate policy of the government under which it uses the instruments of taxation, public expenditure and public borrowing to influence both the pattern of economic activity and level of aggregate demand, output and employment. ▪ Fiscal policy is in the nature of a demand-side policy. An economy which is producing at full-employment level does not require government action in the form of fiscal policy. Introduction The classical economists held the belief that the government should not intervene in the economy because the market mechanism makes the economy self-adjusting and keeps the economy at or near the natural level of real GDP at all times. The government should have a balanced budget and any deliberate fiscal policies are unnecessary. The Depression resulted in very low aggregate demand along with high levels of unemployment. The classical economics could not provide any solution to this problem. In 1936, the British economist John Maynard Keynes in his book ‘The General Theory of Employment, Interest, and Money’ advocated increase in government spending to combat the recessionary forces in the economy and to solve the problem of unemployment. In recent times, especially after being threatened by the global financial crisis and recession, many countries have preferred to have a more active fiscal policy.
Objectives of Fiscal Policy Since nations differ in numerous aspects, the objectives of fiscal policy also may vary from country to country. However, the most common objectives of fiscal policy are: ▪ Achievement and maintenance of full employment, Maintenance of price stability, Acceleration of the rate of economic development, and Equitable distribution of income and wealth The importance as well as order of priority of these objectives may vary from country to country and from time to time. For instance, � while stability and equality may be the priorities of developed nations, economic growth, employment and equity may get higher priority in developing countries. ▪ Governments may directly as well as indirectly influence the way resources are used in an economy. Fiscal policy is a powerful tool for managing the economy because of its ability to influence the total amount of output produced viz. gross domestic product. ▪ The ability of fiscal policy to influence output by affecting aggregate demand makes it a potential instrument for stabilization of the economy. AD/GDP = C + I + G + NX The governments can influence the level of economic activity (GDP) by directly controlling G (government expenditure i.e purchases of goods and services by the government) and indirectly influencing C (private consumption), I (investment), and NX (net exports or exports minus imports), through changes in taxes, transfer payments and public expenditure. - Moderate Inflation . Direct
Types of Fiscal Policy Contra cyclical fiscal policy or fiscal policy measures to correct different problems created by business-cycle instability are of two basic types namely, expansionary fiscal policy and contractionary fiscal policy. � Expansionary Fiscal Policy ▪ Expansionary fiscal policy is designed to stimulate the economy during the contractionary phase of a business cycle or when there is an anticipation of a business cycle contraction. A recession is said to occur when the overall economic activity declines, or in other words, when the economy ‘contracts’. A ‘demand-deficient’ recession sets in with a period of falling real GDP, low aggregate demand and reduced consumer spending and rising unemployment. To combat such a slump in overall economic activity, the government can resort to expansionary fiscal policies. � We may technically refer to this as a policy measure to close a ‘recessionary gap’. How does the government achieve this? � The government may cut all types of taxes, direct and indirect, leaving the taxpayers with extra money to spend so that there is more purchasing power and more demand for goods and services. Consequently aggregate demand, output and employment increase. � An increase in government expenditure will pump money into the economy and increase aggregate demand. This in turn will increase output and employment. A combination of increase in government spending and decrease in personal income taxes and/or business taxes. ▪ While resorting to expansionary fiscal policy, the government may run into budget deficits because tax cuts reduce government income and the government expenditures exceed tax revenues in a given year. 1. Expansionary - Tab contraction did I Hume Expansion Chahiye. boust Fight fall - ADLAS- Income Tax GST output 34 R
� Contractionary fiscal policy ▪ Contractionary fiscal policy is designed to restrain the levels of economic activity of the economy during an inflationary phase or when there is anticipation of a business-cycle expansion which is likely to induce inflation. ▪ Contractionary fiscal policy refers to the deliberate policy of government applied to curtail aggregate demand and consequently the level of economic activity. � In other words, it is fiscal policy aimed at eliminating an ‘inflationary gap’. ▪ If the state of the economy is such that its growth rate is extraordinarily high causing inflation and asset bubbles, contractionary fiscal policy can be used to confine it into sustainable levels. Contractionary fiscal policy works through: � Decrease in government spending: With decrease in government spending, the total amount of money available in the economy is reduced which in turn has the effect of reducing the aggregate demand. Increase in personal income taxes and/or business taxes: An increase in personal income taxes reduces disposable incomes leading to fall in consumption spending and aggregate demand. An increase in taxes on business profits reduces the surpluses available to businesses, and as a result, firms’ investments shrink causing aggregate demand to fall. Increased taxes also dampen the prospects of profits of potential entrants who will respond by holding back fresh investments. � A combination of decrease in government spending and increase in personal income taxes and/or business taxes. ▪ Contractionary fiscal policy should ideally lead to a smaller government budget deficit or a larger budget surplus. Jab ExpansionCha , ADAS , Inflation" , Pica control decrease ADTAS - DeficitA ↓&> R↑ Deficity SurplusR2 ~ Revenue ↑ Exp1,