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FISCAL POLICY Government Revenue PART 5 BY AYUSSH SANGHI
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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:
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.
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.
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
Illustration 3 (c) Fiscal Policy and Deficient Demand: There are certain fiscal measures to correct the situation of deficient demand: xk
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.
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.
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.
Decrease in Government Expenditure Government expenditure is reduced so as to cause the demand to decline.