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Understanding Fiscal Policy Tools and Types

Fiscal policy involves a government's spending and tax policies to influence economic conditions. It uses tools like taxation, government spending, and public debt to achieve objectives such as economic stability and full employment. There are two main types of fiscal policy - expansionary and contractionary. Expansionary policy uses increased spending and lower taxes to boost aggregate demand, while contractionary policy raises taxes and cuts spending to slow economic growth. The finance minister is responsible for setting a country's fiscal policy through its annual budget.

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73 views4 pages

Understanding Fiscal Policy Tools and Types

Fiscal policy involves a government's spending and tax policies to influence economic conditions. It uses tools like taxation, government spending, and public debt to achieve objectives such as economic stability and full employment. There are two main types of fiscal policy - expansionary and contractionary. Expansionary policy uses increased spending and lower taxes to boost aggregate demand, while contractionary policy raises taxes and cuts spending to slow economic growth. The finance minister is responsible for setting a country's fiscal policy through its annual budget.

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Qurat ul Ain
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Introduction and Tools of Fiscal Policy

Introduction:
• Fiscal Policy is a part of Macroeconomics
• Fiscal policy is the use of government spending and taxation/tax policies to
influence the economic conditions especially macroeconomic condition.
• In simple terms, is an estimate of taxation and government spending that
impacts the economy.
Sound
Taxation + Spending =
Economy

According to Paul Samuelson:

• “Fiscal policy means public expenditure and tax policies”.

Meaning of Fiscal policy:


• The word fisc means “state treasury” and fiscal policy refers to policy concerning the
use of “state treasury” or the government finance is to achieve the microeconomic
goals.
• Fiscal Policy involves the decisions that a government makes regarding collection of
revenue through taxation and about spending that revenue.

Types of Fiscal Policy


1.Expansionary
2.Contractionary

➢ Expansionary Policy:

Taxes. Spending
• Expansionary fiscal policy uses increased government spending videos taxes
or combination of the two.
• The chief extension objective of a fiscal is to increase aggregate demand for
goods and services across the economy, as well as to reduce unemployment.
➢ Contractionary policy:

Taxes Spending

• Slow economic growth in case of high inflation.


• Raises taxes and cuts spending.

Objectives:
• Economics stability
• Price stability and control of inflation
• Full employment
• Allocation of resources
• Encouraging investment
• Economic development
• Capital formation and growth
• Increasing national income

Tools of fiscal policy:


➢ Taxation
➢ Spending

Taxation:
• Tax is legal compulsory payment paid to the government by the people.
• This the most common and effective way for the government to influence the
aggregate demand in economy.

Direct tax:
• It is the tracks where the liability to pay and the incidence lie on the same person .
• For example, income tax, corporate tax, property tax etc.

Indirect tax:
• When the liability to pay and the incidence of the tax lie on different person.
• For example, sale tax VAT service tax etc.

Spending:
• Spending is used as a told for fiscal policy to drive government money to specific
sectors needing an economic boost.
• For example, welfare programs government salaries subsidies.
Instruments of fiscal policy
• Budgetary policy
• Taxation
• Public expenditure
• Public debt

➢ Budgetary Policy

• Budget is prepared annually to determine expenditure saving and investment


of government.
➢ Taxation:
• If money supply is high government increase tax and if money supply is low
government can decrease.
➢ Public Expenditure:
• Helps to promote physical interest and facilities.
➢ Public debt:
• When government take loan from domestic or foreign market.

How does fiscal policy work?


• Changing the level and types of taxes, the extent and composition of
spending, and the degree and form of borrowing .

Who sets fiscal policy?


• Finance minister of country.

Importance of fiscal policy


• It mobilizers resources of financing projects
• Development activities like expenditure on railways, infrastructure etc.
• Non development activities include spending on subsidies salaries pensions
etc.
• It minimize is income and wealth inequalities.
• Stabilizers price and helps control inflation.

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