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the RBI where as the Fiscal policy decisions are set by the National Govt. Both these policies are adopted to control the economic growth of the country.
A monetary policy is expected to improve the economy's rate of growth of output ( which is measured by GDP. Tight or restrictive monetary policy is designed to slow the economy in the future to offset inflationary pressures. Likewise, fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while tax increases and spending cuts tend to slow the rate of future economic expansion. Fiscal Policy and Monetary Policy both are the major terms used in the economics and both deal in the overall demand and supply of India. Fiscal policy deals in govt. spending and revenue collection by the way of tax. Whereas Monetary Policy is a process which controls the demand and supply of money. Fiscal Policy can affect monetary policy. Fiscal policy can affect the inflationary rates also through its effect on aggregate demand. For E.g. As now we know that fiscal policy deals in govt. spending and taxation, so if govt. start levying extra tax then the consumer will have less money in their hands and thus less spending. Less spending means less demand that means more supply and less demand which will ultimately result in cheaper goods and thus the inflation rates will start to lower. This is only the one case I have explained which can be in either case as well. That means if more liquidity is in the market then more money will be there in the hands of the consumer which will surge the demand and when too much of money is running for too few goods this will result in higher prices of the goods and thus higher inflation. Now coming to monetary policy, it is an instrument used by the govt. to influence the economic growth, inflation, exchange rates, as well as unemployment rate of the country. Monetary Policy is been referred to as expansionary or contractionary policy. Contractioanry policy is adopted when govt. want to control the higher inflation rate for which govt. reduces the money supply or raises the interest rate. Expansionary policy is adopted when there is a liquidity crunch or when there is lack of money supply for which size of the money supply is increased or interest rates are decreased. For fiscal policy there are three possible positions:
Instruments of Fiscal Policy By Gregory Hamel. An Contractionary position is when there is a lower budget deficit where the govt. spending is higher than the revenue collected from the tax. spending is fully funded by the revenue collected from the tax. Other People Are Reading What Are Benefits of Monetary Policy Over Fiscal Policy? Monetary Vs. Expansionary Position 3. Taxation . while fiscal policy aims to impact the economy through government spending and revenue collection. Monetary policy describes actions taken by the Federal Reserve such as changing the interest rates banks charge one another for money and bank reserve requirements. An Expansionary position is when there is a higher budget deficit where the govt. spending is lower than the revenue collected from the tax.1. eHow Contributor Print this article Monetary policy and fiscal policy are two different methods that the government uses to influence the state of the economy. Contractionary Position A Neutral position applies when the budget outcome has neutral effect on the level of economic activity where the govt. Neutral Position 2. Fiscal Policy 1.
Government Spending o o Government spending is the other main instrument of fiscal policy. A decrease in taxation tends to put more money into the hands of consumers. the funds that go into the project could go toward hiring workers which could reduce unemployment and inject money into the economy. Increased spending tends to lead to higher revenues for businesses. the government tends to cut taxes and may increase spending in an attempt to spark growth. Operating on a deficit causes the government to accumulate debt. low unemployment and to stabilize the economy. the government may increase taxes and cut spending to ensure that the economy doesn't grow too quickly which can result in undesirable effects like high inflation. Sponsored Links GRE Class in Mumbai Personalised Coaching Centre in Andheri. For example. if the government funds a project to build a high-speed train across the country. Considerations o The government uses fiscal policy to promote economic growth.o Taxation is one of the two primary instruments of fiscal policy. Call . Higher levels of government spending tend to promote employment and economic growth.in Government Deficit o Reducing taxes and increasing spending can both promote economic growth. During period of low economic growth.html#ixzz2HCvFCYat .9619248430 www. which can lead to increased spending. Cutting taxes is a common fiscal policy measure to encourage economic growth. which can allow them to expand and hire more workers. but if the government spends more than it takes in through taxes it is operating on a deficit. When the government increases or decreases taxes.impactconsultant.ehow.com/info_8557794_instruments-fiscal-policy. it increases or decreases the amount of money consumers have to spend which can have a significant impact on the direction of the overall economy. Read more: Instruments of Fiscal Policy | eHow. During periods of high economic growth.com http://www. The expenditures of the government can promote economic activity and create jobs. meaning it is losing money over time.
for example. Both involve the use of the government's budget and its ability to levy taxes. Capitol. The legislative and executive branches of government control this type of economic policy. Other People Are Reading Advantages & Disadvantages of Fiscal Policy What are Fiscal Policies? 1. which each having different objectives. Congress and the president make fiscal policy decisions.By Shane Hall.S. In the United States. Fiscal policy uses the government's powers of taxation and spending to influence the amount of employment and output across the economy. Types o Fiscal policy is one of the main ways in which government tries to influence overall economic performance in the United States. housed in the U. eHow Contributor Print this article Congress. The two main types of fiscal policy are expansionary and contractionary policy. There are two basic types of fiscal policy. makes most fiscal policy decisions. .
These include reducing the overall size and scope of government activity or lowering budget deficits.com/AdWords Expert Insight o Expansionary fiscal policy has a multiplier effect. government tries to stimulate the economy. reduced taxes or a combination of the two.S. those purchases raise production and employment at the contractor.Expansionary Fiscal Policy o o Expansionary fiscal policy uses increased government spending. they engage in contractionary fiscal policy. if the Defense Department orders additional parts and equipment from a defense contractor. lowering inflation. In addition. For example. governments may enact contractionary policy for ideological reasons.Google. Get 2000 INR Advertising Credit When You SignUp www. But it may also lead to higher unemployment. The economics department at Harper College in Illinois points out that contractionary policy reduces aggregate demand in the economy. in which each dollar spent by government generates additional demand across the economy. Governments may enact contractionary measures to slow an economic expansion and prevent inflation. By boosting its own purchases of goods and services. a Harvard economist and former White House adviser. The chief objective of a fiscal expansion is to increase aggregate demand for goods and services across the economy. the U. in which the government spends more money than it collects. as well as to reduce unemployment. according to Professor Gregory Mankiw. when unemployment rises and output decreases. government used expansionary fiscal policy to combat the effects of the Great Depression. Governments often enact expansionary measures during an economic recession. Contractionary Fiscal Policy o When government policy-makers cut spending or increase taxes. illustrating the multiplier effect resulting from a fiscal expansion. During the 1930s. Sponsored Links Get New Customers Online Advertise On Google. Considerations . The firm's employees increase their spending on consumer goods.
employment.o Economic fluctuations independent of policy actions by government often affect the level of tax revenues. increasing national income and improving employment. its tools and objectives in detail. Ads by Google The Tax Planner Personal Tax Planning Corporate Tax Planning www. such as increasing revenues by raising taxes or cutting government spending. resulting in reduced revenue for government coffers. . forcing elected officials to alter fiscal policy.html#ixzz2HCzMVv9x iscal Policy Tools In this article. Neutral Stance A neutral stance is characterized by a balanced and stable economy generating large revenue in the form of taxes for the government. The main aim behind this policy is to strengthen the economic position and increase the pace of growth which will in turn bring prosperity to the nation. So. economic recessions reduce output and employment. For example.thetaxplanner. Features The following are the striking features of fiscal policy: Resource mobilization is one of the basic objectives of a fiscal policy where levels of investments need to be improved Resources mobilized have to be used to achieve high levels of productivity which will itself accelerate economic growth of a nation Concentration of wealth has always been the main problem for majority of people having low standard of living.com http://www. we shall try to understand the basic concept of fiscal policy. This often forces policy makers to consider contractionary measures. let us know some basic facts about the fiscal policy. the successful implementation of fiscal measures has become difficult because of high level of tax evasion and lack of knowledge among people Stances Fiscal policy stances are indications or outlook by the government to decide which method suits the best to achieve the targets of inflation and deflation control.uk Fiscal policy is important for any nation because it is this policy that determines the way governments use their revenue and expenditure effectively to improve the nation's income and total productivity.ehow. The tools aim at minimizing inequalities of wealth and income Fiscal policies enable government authorities to control economic situation in times of inflation and deflation Over the years.com/info_8184718_typesfiscal-policies. Read more: Types of Fiscal Policies | eHow.co.
beating inflation and increasing overall employment is known as the discretionary fiscal policy. Government Expenditure and Purchases Government purchases and expenditure. When it comes to expenditure. Discretionary Fiscal Policy Introduction of changes in the government spending. Automatic Stabilizers Automatic stabilizers are those features of the government purchases or spending which aim at minimizing the changes in disposable incomes of people. So. These stabilizers are governed by changes in government purchasing policies. transfer payments and taxation. all sectors of the economy are included in the government spending. For proper spending. They are payments made by the government without any expectations of returns. These purchases are nothing but money spent by the government on final goods and services. Basic Tools The discretionary fiscal policy and automatic stabilizers are the main fiscal tools which are used for improving overall economic condition of a nation's economy. This planned government expenditure helps in creation of large-scale employment which will raise standard of living of common people and help the government earn more in taxes. transfer and taxation for promoting fast macro-economic growth. Here is an explanation of these tools. the Federal government forms several agencies and institutions which actually execute the purchases on behalf of the government. Transfer Payments Transfer payments are yet another important fiscal policy tools. The transfer payments are of three types: Welfare benefits for the poor Unemployment benefits to eligible unemployed people . Apart from these basic tools. These transfer payments are for the benefit of the public. Generally. these agencies receive funding and assistance directly from the Federal government. Contractionary Stance The contractionary stance is governed by low government spending as compared to the revenue generated from taxes. the tools which are mostly used are government expenditure. when done in an extremely controlled and systematic manner can help in the expansion of the government sector and steady economy growth achievement.Expansionary Stance The expansionary stance is when the government spending is greater than the revenue generated from taxes. every government has planned budgets and procedures as of where investments would be made.
So. employment etc. Taxes levied on people and corporations are the best source of income for the government. has an impact on fiscal policy.buzzle. the following are the most important: Read more at Buzzle: http://www.html The limitations of Fiscal Policy It has been a great success in developed countries but only partially so in developing countries. Read more at Buzzle: http://www.buzzle. a majority of the people are illiterate. The tax structure in the developing countries is rigid and narrow. by people who are not conscious of their roles in development. A sizable portion of most developing economies is non-monetized. 4. Among the various tools of fiscal policy. Large-scale tax evasion.Social security benefits for the aged The main advantage of transfer payments is that this helps the needy people have more cash in hand and increases habit of consumerism in them. Most developing economies have corrupt and inefficient administrations that fail to implement the requisite measures vis-àvis the implementation of fiscal policy. investment. It requires efficient administrative machinery to be successful. these were the three vital tools that help the government in attaining its aim of accelerated economic development. rendering fiscal measures of the government ineffective and self-defeating. This is due to the fact that.asp . So. these people can buy goods from the market. in developing countries. Lack of statistical information as regards the income. there must be a continuous source of income for the government treasury too. the government spends a lot of money on public welfare and economic development. which in turn increases business for owners and benefits the economy. Government Taxes As seen in the above two fiscal policy tools. So. 3. makes it difficult for the public authorities to formulate a rational and effective fiscal policy. The entire tax system is monitored and controlled by Internal Revenue Service (IRS) and tax rates are decided as per the income levels of people. public participation and co-operation is also equally important. conditions conducive to the growth of well-knit and integrated tax policies are absent and sorely missed. By appointing experienced economists in the panel that takes decisions regarding the fiscal policy of a country. 5. savings. 2. It cannot succeed unless people understand its implications and cooperate with the government in its implication. it is certainly possible to achieve long term economic goals comfortably. Thus. Following are some of the reasons that are hindrances for its implementation in developing countries: 1. expenditure. For the success of a fiscal policy.com/articles/fiscal-policy-tools. apart from government initiative and willingness.com/editorials/8-10-2004-57690.