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Examples of Tools related to Fiscal Policy (for UPSC CSE)
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Ayussh Sanghi, in this lesson, will be speaking about the illustrations of tools related to the fiscal policy. The major illustrations which one will be able to understand through this lesson are Fiscal instruments Related to Government Expenditure, Fiscal Instruments Related to Financing of Government Expenditure, Fiscal Policy and Deficient Demand, and Fiscal Policy and Excess Demand.

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Ayussh Sanghi
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Unacademy user
it was so nice lecture to understand thanks
Thanks you so much sir for your great selfless Efforts
sir, how is public debt different from deficit financing??
its a great lesson in this series.
Sir i understood your concept theoritically , but say inflation is high then onion price is high , but if we increase tax to decrease demand then people will have less salary to buy onions then how we decrease inflation ?? Ppl still cant buy ??
Utsav Srivastav
3 years ago
Exactly as people's purchasing power goes down with increase in tax, demand goes down and it will lead to lowering in inflation and hence then people would now be able to buy.
Vishwender Singh
3 years ago
More money is chasing less goods.If together central government will increase tax and banks will increase interest rates then surplus money will be evacuated from the market and hence decline in demand.Also,central government will import more onions from neighbour countries it will boost the supply and hence in this way prices will be stabilised.
Rohit Kumar
3 years ago
The effects would not be visible immediately, however with progressive manner, People would be able to spend less hence dragging down the demand. Anyway these are macroeconomics model and should be applied for aggregate level but not on individual economic agent.
Amrita Gupta
2 years ago
Abhishek kumar
a year ago
@Abhishek kaushik......suppose during inflation govt charges u with more tax which implies (=>) less money in ur though u have a tendency to eat spicy food garnished with onion...but as u r left with less money.....u wud first try to have rice, chappatti and pulses in ur plate or whatever generic or necessary daily consumption item is......then u will think of onions !!....suppose u r left with that much which could fetch 10 kg onion a month while ur normal onion consumption in normal days when there was not inflation was 20kg. So, becoz of less money ur demand has been reduced by 10kg a month subsequently if this reduction side gains weight and availablity of onion in market once again will start increasing...which wud later lower down the prices of onion. ( and this is explained on the basis when demand and supply are interacting freely without market intervention )

  2. ABOUT ME >Passionate about Teaching >Taught at most reputed Civil Services Institutes >CA, Lawyer >Hit "Contribute to Ayussh" Follow me on: AyusshSanghi

  3. Instruments of Fiscal Policy Fiscal policy refers to the policy related to revenue and expenditure of the government with a view to correcting the situations of excess demand or deficient demand in the economy The instruments of fiscal policy are:

  4. Illustration 1 (a) Fiscal Instruments Related to Government Expenditure: The government of a country incurs various types of expenditure such as expenditure on: public works (construction of roads, dams, bridges etc), education and public welfare defence, k maintenance of law and order, k various types of subsidies and transfer payments to the public.

  5. Illustration l (a) Fiscal Instruments Related to Government Expenditure: * Government corrects the situations of excess demand or d in the economy by varying any or al deficient demand in the economy by varying any or all types of expenditure.

  6. Illustration 2 (b) Fiscal Instruments Related to Financing of Government Expenditure: * Taxation, * public debt and k deficit financing are the three fiscal instruments related to financing of government expenditure. * Government can correct the situations of excess demand or deficient demand in the economy by using above mentioned instruments

  7. Illustration 3 (c) Fiscal Policy and Deficient Demand: There are certain fiscal measures to correct the situation of deficient demand: xk

  8. Decrease in Taxes * Government decreases taxes, which leaves the households with more purchasing power and the firms with more cash reserves xk reduced. As a result both households as well as investors will be encouraged to spend more. Consequently, demand will increase.

  9. Increase in Public Expenditure sk timulate the demand the governmer expenditure over public health, education, subsidies and transfer payments, and public works. Public expenditure causes the level of income to increase in economy. Higher level of income causes high level of demand.

  10. Increase Deficit financing * Decicit fnancing (by way of printing more notes for Deficit financing (by way of printing more notes for additional expenditure) is increased during times of deficient demand so that the overall level of purchasing power is enhanced in the economy.

  11. Decrease in Government Expenditure Government expenditure is reduced so as to cause the demand to decline.