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Lecture Dated 05.06.

2013 Fiscal Policy / Budgetary Policy:Fiscal Policy is the policy of regulating and contracting the Revenue and Expenditure of the procurement to achieve certain Macro Economic objectives.

If Revenue is less than Expenditure/will be Budget Deficit/Deficit Financing.

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Objective of Fiscal Policy: Following are the Objectives of Fiscal Policy:1. 2. 3. 4. 5. 6. 7. High growth of National Income Fair distribution of National Income High Employment Price Stability Reduction in Regional disparities Discouraging production and consumption of un-necessary goods Reduction in deficit of Balance of Payments

Instruments / Tools of Fiscal Policy: Following are Instruments / Tools of Fiscal Policy:A. Automatic / Built-in Stabilizer : (Non-Discretionary Tools) (i). (ii). (iii). (iv). B. Progressive Taxation Un-employment allowance Support price policy Corporate and family savings

Discretionary Tools): (i). (ii). (iii). (iv). Change in Tax rates Change in public works expenditure Change in transfers of payments Credit Aids

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Lecture Dated 06.06.2013 Business Cycles: Fluctuation in economic activity comprising National Income and employment is called Business Cycles. It is also called Trade Cycles. (i). (ii). (iii). (iv). Recovery Boom or Peak Recession Depression

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Important Features: 1. 2. A trade cycle is said to be completed, when it passes through all the four phases i.e. Recovery, Boom, Recession and Depression. There is no hard and fast rule for the time period for the completion of trade cycle. However, it is said that it takes two (2) to ten (10) years for its completion. The recovery phase is normally longer than the recession phase. Every Boom or depression is normally at a higher level of economic activity than previous one.

3. 4.

Business Cycle and Fiscal Policy: The Government operates fiscal policy in order to reduce the fluctuations in economic activity in the following manner: (i). At the time of boom government operates contractionary fiscal policy in which tax rates are increased and government revenue increases whereas government reduces its expenditure. At the time of depression government operates expansionary fiscal policy in which tax rates are reduced and government revenue decreases whereas government increases its expenditure in order to move economy out of depression.

(ii).

Monetary Policy: Monetary Policy is the policy of controlling supply and demand for money and credit in the economy. Following are the functions / Features of monetary policy: 1. 2. 3. 4. 5. Creation and Expansion of financial institutions A suitable interest rate policy Debt Management (public debt) Proper adjustment between supply and demand for money Credit Control: (i) Quantitative Measures: (a). (b). (c). Open market operation Bank rate policy Variable reserve ratio

(ii). Qualitative Measures: (a).


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Selection credit controls.


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