FISCAL POLICY

DR. QAZI SUBHAN

INTRODUCTION
• There are three demand management policies which are managing the
Aggregate demand.
• Main objectives of these policies are to stabilize the economy if there is any
trouble in the economy.
• First two policies are related to closed economy and the last policy is
concerned to open economy. Policies are as follows.

• Fiscal Policy ---------------Affects Product Market

• Monetary Policy----------- Affects Money Market

• Exchange Rate Policy-- Affects Product Market

FISCAL POLICY
• Definition

• Objectives of Fiscal policy

• Tools of Fiscal Policy

• Kinds of Fiscal Policy

• Application of tools of fiscal policy to Economic situation.

DEFINITION
• Fiscal Policy means that policy which is formulated by the government to
achieve its objectives with the help of its tools.
• Fiscal policy is concerned with government purchases, taxes, federal
budget, budget deficit and transfer payments.
OBJECTIVES OF THE FISCAL POLICY

• Sustainable Economic Growth

• Price stability

• Employment Opportunities
TOOLS OF FISCAL POLICY

• Government Expenditure
• Taxes
• Direct Tax
• Indirect Tax
TYPES OF TAXES

Direct Tax Indirect Tax

• Income Tax • Sales tax
• Property tax • Value Added Tax
• Wealth Tax • GST

Other Types of Tax

•Progressive tax Proportionate tax
•Regressive tax Digressive Tax
•Advelorem tax Specific Tax
•Compound Tax
KINDS OF FISCAL POLICY

• Contractionary Fiscal Policy (Tax and G )

• Expansionary Fiscal Policy (G and Tax )

 APPLICATION OF FISCAL POLICY TO THE ECONOMY

• Business Cycles

• To Product Market

• To Money Market

• To Labor Market
• General Equilibrium
FISCAL POLICY AND BUSINESS CYCLE
• When the economy is in boom situation then contractionary fiscal policy
has been used. Progressive tax has been used as an automatic stabilizer of
the economy.
• When the economy is in recovery situation then contractionary fiscal policy
has also been used but proportionate tax has been used to attain the
objectives of fiscal policy
• In case of depression and recession, expansionary fiscal policy has been
used in which government is increasing its development expenditures.
FISCAL POLICY AND PRODUCT MARKET

• Impact of Tax on Product Market

• Consumption would come down
• IS curve shift leftward
• In IS-LM Model, rate of interest decrease
and national income come down
• AD shift leftward
• In general equilibrium, Price decreases and
national income would come down
FISCAL POLICY AND PRODUCT MARKET

• Impact of G on Product Market

• If government expenditure would increase
• IS curve shift rightward
• In IS-LM Model, rate of interest increase and national
income increase
• AD shift rightward
• In general equilibrium, Price increases and national income
would increase
FISCAL POLICY AND MONEY MARKET

• Impact of Tax↓ on Money Market

• Real Money Balance would increase
• LM curve shift to right ward which will cause of a decrease in interest rate
• In IS-LM Model, rate of interest decrease and national income increase
• No shift in AD but movement on AD.
• In general equilibrium, No effect on GPL and National Income due to Fiscal
Policy.
• .
FISCAL POLICY AND MONEY MARKET

• Impact of G on Money Market

• Money Demand would shift to right ward
• There is no shift in LM curve but movement
would be occurred.
• In IS-LM Model, no change.
• No change in AD
• In general equilibrium, No Effect on GPL
and National Income due to Fiscal Policy.
• Result: Fiscal Policy is ineffective in
Money Market
FISCAL POLICY AND LABOR MARKET

• Impact of G on Labor Market

• As G increases ► increase in Investment ► labor
demand would increase ► Labor demand would
shift to right ► Aggregate Supply also Shift to
right ► Price decreases and National Income
would increase.
• Note: Tax has negative impact on labor market ►
Labor demand would decrease