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CHAPTER

ROLE OF GOVERNMENT

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ECONOMIC FUNCTION OF
GOVERNMENT

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TYPES OF BUDGET

IMPORTANT FUNCTIONS OF GOVERNMENT

Adjust the allocation of resources
Assist private sector to ensure economic stabilization
Create a business environment

1. BALANCED
BUDGET

2. SURPLUS
BUDGET

3. DEFICIT
BUDGET

The governments
total expenditure
is equal to its
total revenue.

The governments
total expenditure
is less than its
total expenditure.

The governments
total expenditure
is more than its
total revenue.

Redistribute income and wealth among the

population
Provide a legal and social framework for the
effective operation of an economy

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GOVERNMENT REVENUE
(cont.)

GOVERNMENT REVENUE
TAX REVENUE

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OBJECTIVES OF TAXATION

NON-TAX REVENUE
INCOME
SOURCES OF
REVENUE

EQUITABLE DISTRIBUTION OF INCOME

REDUCTION OF HARMFUL CONSUMPTION
REGULATION OF FOREIGN TRADE

NON-REVENUE RECEIPTS
CONSERVATION OF RESOURCES

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TYPES OF TAXES

TYPES OF TAX STRUCTURE

PROPORTIONAL TAX

DIRECT TAXES
Tax paid by the person on whom it is levied which
cannot be passed on to another person.

Tax Rate

Tax which is imposed

at the same rate for all
income levels.

TYPES OF TAXES

INDIRECT TAXES
Burden of tax can be passed on to another person.

Income

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TYPES OF TAX STRUCTURE

(cont.)

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TYPES OF TAX STRUCTURE

(cont.)

PROGRESSIVE TAX

REGRESSIVE TAX

Tax Rate

Tax Rate

Tax which is imposed

at the increasing rate
for all income levels.

Tax which is imposed

at the decreasing rate
for all income levels.

Income

Income

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GOVERNMENT EXPENDITURE

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PUBLIC DEBT

GOVERNMENT OPERATING
EXPENDITURE

The debt which a government

owes to its nationals
of other countries.

GOVERNMENT DEVELOPMENT
EXPENDITURE
INTERNAL
SOURCES
General
administration

Social
services

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Economic
services

Defense and
security

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SOURCES
OF
PUBLIC
DEBT

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EXTERNAL
SOURCES

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INTERNAL AND EXTERNAL

SOURCES

GOVERNMENT POLICY

INTERNAL

1. Borrowing from citizen

2. Borrowing from financial institutions
3. Loans from the central bank

MONETARY
POLICY

4. Loans from commercial bank

EXTERNAL
1. International money market
2. Currency loans from foreign government
3. Loans from international financial institutions

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Achieve a balance of
payment equilibrium

FISCAL
POLICY

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EXPANSIONARY MONETARY POLICY

Increasing money supply in the economy
Achieve full
employment
of resources

Maintain
domestic
price stability
OBJECTIVE
OF MONETARY
POLICY

Maintain a continuously
low structure
of interest rates

TYPES OF MONETARY POLICY

Achieve higher
rate of
economic growth

CONTRACTIONARY MONETARY POLICY

Decreasing money supply in the economy

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INSTRUMENTS OF
MONETARY POLICY
Quantitative
Instruments
1. Open market
operations
2. Legal cash reserve
requirement
3. Bank or discount rate
4. Funding

Securing efficient
allocation of
economic resources

Qualitative
Instruments
1. Selective credit
2. Control
3. Interest rate

OBJECTIVE
OF FISCAL
POLICY

4. Special directive
Controlling the
equitable distribution
of income and wealth

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Attaining and
maintaining full
employment

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Accelerating
the rate of
economic growth
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INSTRUMENTS OF FISCAL
POLICY
EXPANSIONARY FISCAL POLICY
DISCRETIONARY
FISCAL POLICY
1. Government expenditure
2. Taxes

TYPES OF FISCAL POLICY

AUTOMATIC
FISCAL POLICY
1. Transfer payments
2. Taxes

CONTRACTIONARY
FISCAL POLICY

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