POLICY TREND:

if Govt increasing expenditure, decreasing taxes and increasing public sector borrowing it is said
to be “Expansionary Fiscal Policy”. Policy which seeks to increase growth rate is called
“Expansionary Fiscal Policy”.
on the other hand, if Govt decreasing expenditure, increasing taxes and decreasing public
sector borrowing it is said to be “Contractionary Fiscal Policy”. Policy which seeks to reduce
growth rate is called “Contractionary Fiscal Policy”.
Govt policy objectives are conflicting if Govt wants to achieve the objectives of economic
growth and full employment it has to practice expansionary fiscal policy but as an opportunity
cost economy has to face increasing inflation and current account deficit.
On the other hand, if Govt wants to control inflation and current account deficit it has to
practice contractionary fiscal policy but as an opportunity cost economy has to face slow
growth rate and increasing unemployment.

LIMITATIONS OF FISCAL POLICY:

1. Uncertainty about future and forecasting
2. Time lag
3. Crowding out
4. Lack of coordination between fiscal and monetary policy

Q. Define fiscal policy. What are the objectives of Fiscal Policy? How these objectives
are tend to achieve?
Q. What do you mean by Expansionary and Contractionary Fiscal Policy? Objectives of
Fiscal Policy are conflicting explain how? What are the limitations of Fiscal Policy?

NEXT TOPIC
NATIONAL DEBT
NATIONAL DEBTS:
Overall loans taken by federal Govt from internal and external resources is called “National
Debt” whereas overall loan taken by various sector of an economy inclusive of national debt
consumer debt and business debt is called “Pubic Debt” whereas annual repayment installment
of national debt inclusive of interest is called “National Debt Servicing”.

SOURCES OF PUBLIC SECTOR BORROWING:

EXTERNAL SOURCES:
1. World bank
2. Asian developing bank
3. Paris club or friends club
4. Euro bond or foreign currency bonds
5. IMF

INTERNAL SOURCES:
1. Central bank
2. Commercial banks
3. T-bills, bonds and Govt securities
4. National savings

TAXES:
Compulsory payments which is made by every citizen to contribute state affairs is called “Tax”.

FUNCTIONS OF TAXES:
1. Fiscal function or to rise Govt revenue
2. Allocative function or redistribution of wealth and income
3. Incentive function
4. Regulatory function
5. Promotion of Civic Sense
INDIRECT TAXES:
Taxes which are not directly collected by the revenue authorities but through the means of
producers and sellers are known as “indirect taxes”. These taxes are imposed upon the
manufactures but ultimate tax incidence lies upon the consumers. These taxes are inclusive if
price of goods and services and paid by the consumers at the time of expenditure that is why
these taxes are known as “taxes on expenditures”. General sales tax or value addition tax are
the examples of indirect taxes.
Generally indirect taxes increases the cost of production that is why cause a leftward shifting in
aggregate supply curve.

EFFECTS OF INDIRECT TAXES:

S.R.A.S
S.R.A.S1C.R.A.S

E1
P1
E
PRICE P
LEVEL

A.D

0 Y1 Ý YF Y
Y1

INCOME

ADVANTAGES OR MERITS OF INDIRECT TAXES:

1. Easy to pay
2. Unavoidable or compulsory payment
3. Helpful in controlling consumer’s consumption pattern
4. Helpful in controlling negative externalities
5. Helpful in controlling demerits goods
6. Wide range or broad base
7. Elastic or helpful in rising tax revenue
8. Provide consumers a greater choice

DEMERITS OF INDIRECT TAXES:

1. Inequitable
2. Uncertain
3. Uneconomical
4. Complicated
5. Inflation causing
PROGRESSIVE TAXES:
These are the taxes in which rate of tax and amount of tax both keeps on increasing with an
increase in income are called “Progressive Tax”. These taxes are generally direct taxes therefore
follows all the merits and demerits of direct taxes. Income tax is an example of progressive
taxes.
EXAMPLE:
Income Rate of Tax
1 – 400,000 NIL
400,001 – 700,000 2%
700,001 – 1,200,000 3%

TAX RATE
PROGRESSIVE
TAXES

0
INCOME

REGRESSIVE TAXES:
These are the taxes in which rate of tax in proportion to income keeps on decreasing with an
increase in income is called “Regressive Tax”. These taxes are generally indirect taxes.
Therefore follows all the merits and demerits of indirect taxes. G.S.T or V.A.T are the examples
of regressive taxes.
EXAMPLE:
Let G.S.T = 10%
Net price = Rs 1000
G.S.T = Rs 100
Gross profit = Rs 1100
Income Tax Rate of Tax
10,000 100 1%
50,000 100 0.2%
100,000 100 0.1%
 TAX RATE

REGRESSIVE TAX
0 INCOME

PROPORTIONAL TAXES:
These are the taxes in which rate of tax remain same but amount of tax keeps on increasing
with an increase in income “Proportional Tax”. These taxes are generally are direct taxes. Zakat
or income tax in a particular slap are the examples of proportional taxes.
Income Rate of Tax
500,000 – 1,000,000 3%

TAX RATE

PROPORTIONAL
TAXES

0 INCOME
 DIFFERENCE BETWEEN PUBLIC AND PRIVATE FINANCE:
PUBLIC FINANCE
1. Individuals finance belong to state.
2. Price is not generally very large.
3. Individuals can not make large and deliberate
changes in there budget.
4. They keeps there budget secret.
5. Objectives of Private finance are generally either
profit maximization or utility maximization.
6. Budget deficit is rare or occasional in private
finance.
7. In case of budget deficit individuals can borrow
only from internal sources.
8. In case of budget deficit individuals can not create
money or can’t print currency notes.
9. In private finance individuals always adjust there
expenditure according to there income.
PRIVATE FINANCE
1. Public finance belong to state.
2. Price is generally very large.
3. Govt can make large and deliberate changes in
there budget.
4. There is no secrecy in public finance
5. Objectives of public finance are generally welfare
maximization or development of economic
environment.
6. Budget deficit is a regular practice in public finance.
7. In case of budget deficit Govt can borrow both
from internal and external sources.
8. In case of budget deficit a Govt can create money
or can print currency notes.
9. In public finance a Govt always adjust its income or
revenue according to its expenditures.

FUNCTIONS OF PUBLIC FINANCE:

1. Distributive function
2. Allocative function
3. Stabilization function

IMPORTANCE OF PUBLIC FINANCE:

1. Equity
2. Economic planning
3. Effect of taxes
4. Provision of public and merit goods

CAUSES OF INCREASING PUBLIC EXPENDITURES:

1. Inflation
2. Population
3. Technological development
4. Needs for public utility services
5. Political affairs
6. Economic affairs
7. Defence affairs
ROLE OF PUBLIC EXPENDITURES IN DEVELOPING ECONOMY:
1. Encouraging agricultural sector
2. Encouraging industrial sector
3. Exploring new natural resources
4. Grands and subsidies
5. Provision of public utility services

Q. What do you mean by national and public debt?

Q. What are the sectors of public sector borrowing?
Q. Define tax and describe its function.
Q. Describe various canon of taxation.
Q. What are the qualities of good taxes?
Q. Define direct taxes and describe its merits and demerits.
Q. Define indirect taxes and describe its merits and demerits.
Q. What do you mean by progressive, regressive and proportional taxes?
Q. Distinguish between public and private finance.
Q. Briefly describe the functions of public finance.
Q. Briefly describe the importance of public finance.
Q. What are the causes of increasing public expenditures?
Q. Briefly describe the role of public expenditures in developing economies.
MONEY:
DEFINITION OF MONEY:
Anything which can be used as medium of exchange, store of value and standard of value is
known as “money”. According to WA Walker; “Money is what money does”.

DIFFERENT POINTS OF VIEW ABOUT DEFINITION OF MONEY:

CLASSICAL POINT OF VIEW:
According to classical school of thought money is used to facilitate market mechanism or it is an
instrument used for transaction of goods and services.
According to them money is like lubricate which is used for the smoother interaction of demand
and supply or buyer and seller in a market. It means that according to classical school of
thought money is just a medium of exchange.
KEYNESIAN POINT OF VIEW:
According to Keynes, although money is a medium of exchange but it also used to store value
for future. It means that, according to Keynesian school of thought anything which can be used
as medium of exchange and store of value is known as “money”.
MONETARISTS POINT OF VIEW: (new classical point of view)
According to Monetarists, although money is a medium of exchange and store of value but it
also used to perform other important economic activities.
Aggregate expenditures or GDP is determined by the rate of interest and rate of interest is
determined by the interaction of demand and supply of money.
They further argue that money is also used to determine the inflation and long run
unemployment.

INCONVENIENCES OF BARTAR SYSTEM:

1. Lack of double co-incidence of words
2. Lack of common standard of value or unit of account
3. Lack of store of value
4. Lack deferred payment
5. Lack of transfer of value
6. Lack of sub-divisibility

FUNCTIONS OF MONEY:
1. Medium of exchange
2. Common standard of value
3. Store of value
4. Medium of transfer of value
5. Medium of deferred payment
6. Medium of tax collection
EFFECTS OF INFLATION OR FUNCTIONS OF MONEY:
During high inflation functions of money becomes inefficient which can be explain as follows:
1. During high inflation, value of money keeps on decreasing very sharply that is why
individuals prefer bartered trading rather than monetary trading and money becomes
inefficient or less acceptable medium of exchange.
2. During inflation or high inflation, value of money remains unstable that is why it becomes
poor unit of account or standard of value.
3. Since during inflation, value of money keeps on decreasing that is why value can not be store
efficiently in the form of money and value becomes inefficient store of value.
4. Generally, during high inflation, real rate of interest becomes negative that is a why, a
debtor gains at a loss of creditor. That is why creditor avoids lending in form of money and
money becomes a poor medium of deferred payment.

KINDS OF MONEY:
1. Commodity money – Money which is made of valuable commodities like gold and silver is
known as “Commodity Money”. Face value and intrinsic (self) value of commodity money is
always same. Coins of gold and silver are the example of “Commodity Money”.
2. Commodity backed money – It is a type of paper money fully backed a by precious metal
like gold and silver. These currency notes and paper money are fully convertible into gold
and silver on demand. This was a face of gold standard.
3. Fate money – It a type of paper money it is not fully backed up by precious metals. In this
phase currency notes are partially backed up by gold and partially by Govt securities. These
currency notes are inconvertible into precious metals. These currency notes just having face
value with no intrinsic value and acceptably market on the basis of legal tender and manage
by central monetary authority.
4. Credit money – “Credit money” is a monetary claim against a physical or legal person, which
can be used for the purchase of goods and services. Credit money is created and manage by
commercial banks that is why, it is also known as “Bank Money”. Check, pay order or credit
cards are the examples of “Credit money”.
a) Advantages of credit money:
i. Credit money promotes consumer expenditures by providing consumer credits.
ii. Credit money also promotes investment activities by providing business finance
(credit).
iii. Govt can also increase its spending by issuing bonds, which is a type of credit money.
iv. Foreign trade is also promoted by the effective use of credit money in the form letter
of credit and bill of exchange.
b) disadvantages of credit money:
i) There always be a trust deficit between two parties by using credit money.
ii) There always be a chance of bad debts while using credit money.
iii) Govt can also increase its spending by issuing bonds, which is a type of credit money.
Characteristics or qualities of good money:
1) General acceptability
2) Legal tender
3) Stability of value
4) Durability
5) Cognoscibility
6) Transportability or portability
7) Divisibility
8) Elasticity
9) Economy