Fiscal Policy

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Fiscal Policy:

Fiscal Policy Presented By Nikhil Ojha Satyam Panjwani Amit Dey Prateek Sharma

Fiscal Policy:

Fiscal Policy Fiscal Policy seeks to control aggregate demand by altering the balance between government expenditures and taxation.

Purpose of Fiscal Policy & Monetary Policy:

Purpose of Fiscal Policy & Monetary Policy “To control aggregate demand” Excessive growth in aggregate demand can cause unsustainable short term-growth and inflation. Too little aggregate demand can result in a recession with negative growth and rising unemployment.

Difference Between Fiscal Policy & Monetary Policy:

Difference Between Fiscal Policy & Monetary Policy Fiscal policy gives the direction of economy of a nation. Monetary policy controls the supply of money in the nation. Fiscal policy administers the taxation structure of the nation. Monetary Policy helps to stabilize the economy of the country. Fiscal policy speaks of the government’s economic program. Monetary policy sets the program of key banks of the nation.

Roles of Fiscal Policy:

Roles of Fiscal Policy To remove any deflationary or inflationary gaps. To smooth out fluctuations in the economy associated with the business cycle.

Some terminologies related to Fiscal Policy:

Some terminologies related to Fiscal Policy Budget Deficit :-The excess of central government’s spending over its tax receipts. Budget Surplus :- The excess of central government’s tax receipts over its spending. National Debt:- The accumulated budget deficits(less surpluses)over the years; the total amount of government borrowing.

Cont……...:

Cont……... Public–Sector Net Cash Requirement(PSNR):- The annual deficit of the public sector; and thus the amount that the public sector must borrow.

Expansionary Fiscal Policy:

Expansionary Fiscal Policy When the economy is in recession, expansionary fiscal policy may be in order. Expansionary fiscal policy is an increase in government spending, a decrease in taxes, or some combination of the two for the purpose of increasing aggregate demand and real output. .

Expansionary Fiscal Policy:

Expansionary Fiscal Policy

Outcome of Expansionary Fiscal Policy:

Outcome of Expansionary Fiscal Policy Government Expenditure>Income Budget Deficit

Contractionary Fiscal Policy:

Contractionary Fiscal Policy When demand-pull inflation occurs, Contractionary fiscal policy may help to control it. Contractionary fiscal policy is a decrease in government spending, an increase in taxes, or some combination of the two for the purpose of decreasing aggregate demand and halting inflation.

Contractionary Fiscal Policy:

Contractionary Fiscal Policy

Outcome of Contractionary Fiscal Policy:

Outcome of Contractionary Fiscal Policy Government Expenditures<Income Budget Surplus

Built-In Stability:

Built-In Stability A built-in stabilizer is anything that increases the government’s budget deficit (or reduce its budget surplus) during a recession and increase its budget surplus (or reduce its budget deficit) during an expansion without requiring explicit action by policymakers.

Built-In Stability:

Built-In Stability Taxes reduce spending and aggregate demand; in addition, reductions in spending are desirable when the economy is moving toward inflation, whereas increases in spending are desirable when the economy is slumping.

Evaluating Fiscal Policy:

Evaluating Fiscal Policy In evaluating the status of fiscal policy, we must adjust deficits and surpluses to eliminate automatic changes in tax revenues and compare the sizes of the adjusted budget deficits (or budget surpluses) to the level of potential GDP. The standardized budget ( or full-employment budget ) is used for this purpose.

Evaluating Fiscal Policy:

Evaluating Fiscal Policy The standardized budget is a measure of what the national budget deficit or surplus would be with existing tax rates and government spending programs if the economy had achieved its full-employment GDP in the year. The standardized budget deficit is zero at the full-employment output level.

Evaluating Fiscal Policy:

Evaluating Fiscal Policy If the economy slides into a recession, the standardized budget deficit is still zero since government expenditure equals the tax revenue that would be forthcoming at the full-employment GDP.

Evaluating Fiscal Policy:

Evaluating Fiscal Policy The deficit that arises in a recession is a cyclical deficit and is not caused by government discretionary fiscal policy. A cyclical deficit is a Federal deficit that is caused by a recession and the consequent decline in tax revenue.

Evaluating Fiscal Policy:

Evaluating Fiscal Policy If a standardized deficit of zero in one year is followed by a standardized budget deficit in the next year, then fiscal policy is expansionary. Conversely, if a standardized deficit of zero in one year is followed by a standardized budget surplus in the next year, then fiscal policy is Contractionary.

Problems, Criticisms, and Complications:

Problems, Criticisms, and Complications A number of significant problems may arise in enacting and applying fiscal policy such as: problems of timing political considerations future policy reversals offsetting state and local finance crowding-out effect

Problems, Criticisms, and Complications:

Problems, Criticisms, and Complications Timing issues include recognition lag, administrative lag and operational lag. Political considerations include political business cycles: the alleged tendency of presidential administration and Congress to create macroeconomic instability by reducing taxes and increasing government spending before elections and to raise taxes and reduce expenditures after elections.

Problems, Criticisms, and Complications:

Problems, Criticisms, and Complications Consumption smoothing arises when taxpayers believe policy is only temporary and is likely to be reversed in the future. The fiscal policies of state and local governments are frequently pro-cyclical; they worsen rather than correct recession or inflation.

Problems, Criticisms, and Complications:

Problems, Criticisms, and Complications Another potential flaw in fiscal policy is the crowding-out effect : a decrease in private investment caused by higher interest rates that result from the Federal government’s increased borrowing to finance deficits (or debt).

Current Thinking on Fiscal Policy:

Current Thinking on Fiscal Policy Despite the many complications of fiscal policy, the current popular view is that fiscal policy can help “push the economy” in an intended direction but cannot “fine-tune it” to a specific outcome.

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