Fiscal Policy BE Ppt

8/7/2019 Fiscal Policy BE Ppt

http://slidepdf.com/reader/full/fiscal-policy-be-ppt 1/16

F I SCAL POL ICY

Presented By- Pinakin Patel Presented to- Prof. Tejal Shah



Government spending and taxation to achieve

full employment without inflation

What is a Fiscal Policy?



FISCAL POLICY-MEANING

� The word fisc means µstate treasury¶(FUND) andfiscal policy refers to policy concerning the use of µstate treasury¶ or the govt. finances to achieve the

macroeconomic goals.� ³any decision to change the level, composition or

timing of govt. expenditure or to vary the burden,the structure or frequency of the tax payment is

fiscal policy.´



OBJECTIVES OF FISCAL POLICY

It has 2 major objectives:

i. GENERAL obj-. aimed at achieving

macroeconomic goals

ii. SPECIFIC obj-. relating to any typical

problems of an economy



FISCAL POLICY AND

MACROECONOMICG

OALS

y Economic Growth: By creating conditions for increase in

savings & investment.

yEmployment: By encouraging the use of labour-absorbingtechnology

y Stabilization: fight with depressionary trends and

booming (overheating) indications in the economy

y

Economic Equality: By reducing the income and wealthgaps between the rich and poor.

y Price stability: employed to contain inflationary and

deflationary tendencies in the economy.



INSTRUMENTS OF FISCAL POLICY

Budgetary surplus and deficit

Government expenditure

Taxation- direct and indirect

Public debt

Deficit financing



To Reduce Inflation«

Decrease Government Spending

Tax Increases

FISCAL POLICY AND THE AD-AS MODEL

Contractionary Fiscal Policy

Expansionary Fiscal Policy

To Reduce Unemployment« Increase Government Spending

Tax Reductions



Introduction to The Spending Multiplier:

The impact policies have on the economy is like a ripple effect

Assuming that price is constant, multiplier effect is the magnified

impact of a spending change on aggregate demand

Marginal Propensity to Consume answers the question: ³If income

increases this amount, how much extra will be spent on domesticgoods and services?´

MPC = change in consumption on domestic items

change in income

Marginal Propensity to Withdraw is the effect on withdrawals of a

change in income

MPW = change in total withdraws

change in income



BENE ITS O ISCAL POLICY

Two benefits as a stabilization tool: its regional focus, and the

direct impact it has on spending

Regional Focus:

Discretionary fiscal policy can focus on particular regions where, for

example, unemployment rates are the highest or inflation is at its worst

Automatic stabilizers have the greatest effect in regions that need them

the most

Impact on Spending:

Fiscal policy has a more straightforward impact when altering

government purchases than monetary policy, since the government

itself initiates the change



DRAWBACKS OF FISCAL POLICY

Delays:

R ecognition Lag ± the amount of time it takes policy-makers to realize that apolicy is needed

Decision Lag ± the amount of time needed to formulate and implement anappropriate policy

Impact Lag ± the amount of time between a policy¶s implementation and itshaving an effect on the economy

Political Visibility:

Voters are likely to respond more favourably to increases in governmentpurchases and cuts in taxes

Public Debt:

Public Debt - the total amount owed by the federal government as a result of its past borrowing

Public Debt Charges ± are the amounts paid out each year by the federalgovernment to cover the interest charges on its public debt



IMPACT OF FISCAL POLICY

Balanced budget is the situation where a government¶s expenditure and

revenues are equal

A budget surplus is when a government¶s revenues exceed expenditures

A budget deficit is when a government¶s expenditure exceeds revenues

Size of a government¶s surplus or deficit in relation to the economy¶s

overall GDP gives clues to what type of discretionary fiscal policy inoperation, as well as the automatic stabilizers



FISCAL POLICY GUIDELINES

3 principles that guide government fiscal policy:

1) Annually balanced budgets

2) Cyclically balanced budgets

3) Functional finance

Annually balanced budget is the principle that government revenues andexpenditures should balanced each year

Critics of fiscal policy say annually balanced budget are not necessary for

the society and state it as faulty reasoning

Cyclically balanced budget is the principle that government revenues andexpenditures should balanced over the course of one business cycle



RECENT FISCAL POLICY

Government revenues and expenditures don¶t need to balance

every year but over one business cycle

Function finance is the principle that government budgets

should be geared to the yearly needs of the economy

Defenders of functional finance are those who believe fiscal

policy is a powerful stabilization took

The choice of fiscal policy guideline depends on the

government¶s belief in fiscal policy as an effective took for

stabilizing the economy



Government deficits were highest during recessions during the

early 1980s and early 1990s

Tax revenues fell with slumping incomes during that time as a

result of the automatic stabilizers

Discretionary expansionary policy also contributed since federal

government increased purchases of goods and services to counteract

the effects of sagging outputs and incomes

1990s downturn caused a concern over increased public debt and

lowered confidence in discretionary fiscal policies to counteract a

recession

Fiscal Policy BE Ppt

Documents

Transcript of Fiscal Policy BE Ppt