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Fiscal policy is defined as the policy under which the government uses the instruments of taxation, public spending

and public borrowing to achieve various objectives of economic policy. Objectives of fiscal policy:
a)

Economic stability: It means that level of economic activity is maintained at a stable level so that there are no fluctuations in output and employment. To achieve full employment: It refers to a situation when all those persons who are willing to work at the existing wage rate are able to get work. Also there are workers who are moving from one job to another; they are unemployed for a while. This is known as frictional unemployment.

b)

c)

Economic growth: It is traditionally termed as the process whereby the real per capita income of a country increases over a long period of time. Price stability: There is a tendency of prices to rise in developing economies because of the large development expenditure without a corresponding increase in production during the early phase of economic development. Price stability does not mean that prices remain absolutely stable. A certain degree of rise is both avoidable and desirable in developing economy. Thus price stability means that price changes are kept within a modest range. Reducing inequalities in income and wealth: Developing countries aim at reducing inequalities in the distribution of income and wealth. These countries suffer from marked inequalities in income and wealth. While majority of people struggle hard to make both ends meet, a small number of people roll in luxuries. That is why

d)

e)

developing economies aim at economic development with distributive justice.


f)

Attaining external equilibrium: an important objective of fiscal policy is to attain external equilibrium i.e to attain equilibrium in the balance of payments. Equilibrium in the balance of payments implies that, as far as possible, imports should be equal to exports.

Fiscal policy (measures) to control inflation


1)

Public expenditure: It is an important component of aggregate demand. In order to control inflation it is essential that government expenditure i.e unproductive expenditure of the government be reduced. Taxation: the major plank of anti inflationary fiscal policy is to increase the tax burden by increasing the tax rate and by imposing new taxes. Direct tax can be used for this purpose. At the same time tax system should be evolved as to promote saving habits among the people and also provide incentives for undertaking productive investment. Public borrowing: Public borrowing i.e borrowing by the government from the public can be used in controlling inflation. It enables the government to meet its expenditure thereby reducing the need for deficit financing. It also helps in reducing the amount of purchasing power and thereby total demand in the economy.

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Fiscal policy and economic stability

Fiscal policy may be effectively used in achieving economic stability. The following measures need to be taken to overcome depression and unemployment: 1) The govt should follow a policy of deficit budget, wherein the expenditure of the govt exceeds its revenue. The deficit may be financed through deficit financing. This will increase govt expenditure. 2) Taxes should be reduced so that more purchasing power is left in the hands of the individuals. 3) Public expenditure should be increased, particularly in the form of more expenditure on public works and providing social securities like pensions, unemployment benefits. 4) The govt should borrow funds from those people with whom the funds are lying idle. The following measures can be used to check the situation of boom and inflation: 1) The govt may impose new taxes and raise the tax rate of existing taxes. This will reduce the disposable income of the individuals and thereby reducing the purchasing power. 2) The govt expenditure should be reduced. 3) The govt should follow the surplus budget; i.e the revenue of the govt should exceed its expenditure.

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