MONEY AND BANKING PART 16
TOOLS OF FISCAL POLICY There are 5 tools of fiscal policy 1. Budget 2. Taxation 4. 5. Public expenditure Public work Public debt
PUBLIC DEBT Public debt helps to fight against inflation and deflation. It brings about economic stability and full employment in an economy. The government borrowing can be done in either of the 4 forms: 1. Borrowing from Non-Bank Public 2. Borrowing from Banking System 3. Drawing from Treasu 4. Printing of Money
BORROWING FROM NON BANK PUBLIC When the government borrows from non bank public through selling of bonds, the money may flow out either of consumption or investment or saving or hoarding. The effect of debt operation on national income varies. If the bond selling schemes of the government are attractive, the people induce to curtail their consumption, the borrowings are likely to be non inflationary When the money for the purchase of bonds flows from already existing savings, the borrowing may again be non-inflationary
If the government bonds are purchased by non bank individuals and institutions by drawing upon their hoarded money, there will be net addition to the circular flow of spending. This will be inflationary in nature. When the money for the purchase of bonds flows from already existing savings, the borrowing may again be non-inflationary So, borrowings from non bank public is more advantageous in an inflationary period and undesirable in a depression hase
BORROWING FROM BANKING SYSTEM This is an effective form of borrowing during the recession phase. the banks have excess reserves and the private sector is willing to borrow from it as they consider it non profitable. When unused cash lying with banks is lent out to government, it causes a net addition to the circular flow and tend to raise national income and employment. So borrowing from banking system is very profitable and favoured upon during such times.
BORROWING FROM BANKING SYSTEM Hoever, during boom this is not considered to be the most favoured form of borrowing. Since, the profit expectation is very high, the demand during such inflation is also high The banks find it difficult to extend loans to the government as it has very less cash reserves. If at all loans are extended, they are done by reducing the loan somewhere else. As the government spending is off-set by a reduction in private investment, there will be no net effect upon national income and employment .So, borrowing during depression is desirable and has a positive effect, but during boom it has an undesirable or neautral effect.
DRAWING FROM TREASURY The government can draw upon the cash balances in it's treasury to finance the budget deficit. This is a form of dishoarding and leads to an increase in the money in circulation. It is inflationary in nature. But they do not much effect as they are just small balances required over and above the amount required for normal day to day working.
PRINTING MONEY When new money is printed it leads to an addition in the current circulation of money. o, this form of borrowing is highly inflationary in nature It is desirable during depression as it helps to incrase the level of income and employment, but is not suited during inflation. Through this method, the government not only gets additional resources at minimum cost but can also create appropriate monetary effects like low interest rates and easy money supply and consequently economic system is likely to register a quick revival