Asked in EconomicsBusiness Accounting and BookkeepingEducational Methods and Theories
Economics
Business Accounting and Bookkeeping
Educational Methods and Theories
Explain the role of fiscal policy and monteary policy?
Answer

Wiki User
February 25, 2009 8:45PM
Fiscal Policy involves taxes and spending. It is used (ofen incorrectly) to try to manage the business cycle. It is controlled by congress and the president Monetary policy involves managing the money supply and interest rates. It has proven much more useful in managing inflation and reces fiscal policy also helps in giving such more information about the government expenditure and government policies about the current expenditure
Related Questions
Asked in Economics, Business and Industry
Major objectives of fiscal policy in India?

Meaning of Fiscal Policy ?
The fiscal policy is concerned with the raising of government
revenue and incurring of government expenditure. To generate
revenue and to incur expenditure, the government frames a policy
called budgetary policy or fiscal policy. So, the fiscal policy is
concerned with government expenditure and government revenue.
Image Credits © Center for American Progress.
Fiscal policy has to decide on the size and pattern of flow of
expenditure from the government to the economy and from the economy
back to the government. So, in broad term fiscal policy refers to
"that segment of national economic policy which is primarily
concerned with the receipts and expenditure of central government."
In other words, fiscal policy refers to the policy of the
government with regard to taxation, public expenditure and public
borrowings.
The importance of fiscal policy is high in underdeveloped
countries. The state has to play active and important role. In a
democratic society direct methods are not approved. So, the
government has to depend on indirect methods of regulations. In
this way, fiscal policy is a powerful weapon in the hands of
government by means of which it can achieve the objectives of
development.
Main Objectives of Fiscal Policy In India ?
The fiscal policy is designed to achive certain objectives as
follows :-
1. Development by effective Mobilisation of Resources
The principal objective of fiscal policy is to ensure rapid
economic growth and development. This objective of economic growth
and development can be achieved by Mobilisation of Financial
Resources.
The central and the state governments in India have used fiscal
policy to mobilise resources.
The financial resources can be mobilised by :-
Taxation : Through effective fiscal policies, the government
aims to mobilise resources by way of direct taxes as well as
indirect taxes because most important source of resource
mobilisation in India is taxation.
Public Savings : The resources can be mobilised through public
savings by reducing government expenditure and increasing surpluses
of public sector enterprises.
Private Savings : Through effective fiscal measures such as tax
benefits, the government can raise resources from private sector
and households. Resources can be mobilised through government
borrowings by ways of treasury bills, issue of government bonds,
etc., loans from domestic and foreign parties and by deficit
financing.
2. Efficient allocation of Financial Resources
The central and state governments have tried to make efficient
allocation of financial resources. These resources are allocated
for Development Activities which includes expenditure on railways,
infrastructure, etc. While Non-development Activities includes
expenditure on defence, interest payments, subsidies, etc.
But generally the fiscal policy should ensure that the resources
are allocated for generation of goods and services which are
socially desirable. Therefore, India's fiscal policy is designed in
such a manner so as to encourage production of desirable goods and
discourage those goods which are socially undesirable.
3. Reduction in inequalities of Income and Wealth
Fiscal policy aims at achieving equity or social justice by
reducing income inequalities among different sections of the
society. The direct taxes such as income tax are charged more on
the rich people as compared to lower income groups. Indirect taxes
are also more in the case of semi-luxury and luxury items, which
are mostly consumed by the upper middle class and the upper class.
The government invests a significant proportion of its tax revenue
in the implementation of Poverty Alleviation Programmes to improve
the conditions of poor people in society.
4. Price Stability and Control of Inflation
One of the main objective of fiscal policy is to control
inflation and stabilize price. Therefore, the government always
aims to control the inflation by Reducing fiscal deficits,
introducing tax savings schemes, Productive use of financial
resources, etc.
5. Employment Generation
The government is making every possible effort to increase
employment in the country through effective fiscal measure.
Investment in infrastructure has resulted in direct and indirect
employment. Lower taxes and duties on small-scale industrial (SSI)
units encourage more investment and consequently generates more
employment. Various rural employment programmes have been
undertaken by the Government of India to solve problems in rural
areas. Similarly, self employment scheme is taken to provide
employment to technically qualified persons in the urban areas.
6. Balanced Regional Development
Another main objective of the fiscal policy is to bring about a
balanced regional development. There are various incentives from
the government for setting up projects in backward areas such as
Cash subsidy, Concession in taxes and duties in the form of tax
holidays, Finance at concessional interest rates, etc.
7. Reducing the Deficit in the Balance of Payment
Fiscal policy attempts to encourage more exports by way of
fiscal measures like Exemption of income tax on export earnings,
Exemption of central excise duties and customs, Exemption of sales
tax and octroi, etc.
The foreign exchange is also conserved by Providing fiscal
benefits to import substitute industries, Imposing customs duties
on imports, etc.
The foreign exchange earned by way of exports and saved by way
of import substitutes helps to solve balance of payments problem.
In this way adverse balance of payment can be corrected either by
imposing duties on imports or by giving subsidies to export.
8. Capital Formation
The objective of fiscal policy in India is also to increase the
rate of capital formation so as to accelerate the rate of economic
growth. An underdeveloped country is trapped in vicious (danger)
circle of poverty mainly on account of capital deficiency. In order
to increase the rate of capital formation, the fiscal policy must
be efficiently designed to encourage savings and discourage and
reduce spending.
9. Increasing National Income
The fiscal policy aims to increase the national income of a
country. This is because fiscal policy facilitates the capital
formation. This results in economic growth, which in turn increases
the GDP, per capita income and national income of the country.
10. Development of Infrastructure
Government has placed emphasis on the infrastructure development
for the purpose of achieving economic growth. The fiscal policy
measure such as taxation generates revenue to the government. A
part of the government's revenue is invested in the infrastructure
development. Due to this, all sectors of the economy get a
boost.
11. Foreign Exchange Earnings
Fiscal policy attempts to encourage more exports by way of
Fiscal Measures like, exemption of income tax on export earnings,
exemption of sales tax and octroi, etc. Foreign exchange provides
fiscal benefits to import substitute industries. The foreign
exchange earned by way of exports and saved by way of import
substitutes helps to solve balance of payments problem.
Conclusion On Fiscal Policy ?
The objectives of fiscal policy such as economic development,
price stability, social justice, etc. can be achieved only if the
tools of policy like Public Expenditure, Taxation, Borrowing and
deficit financing are effectively used.
Though there are gaps in India's fiscal policy, there is also an
urgent need for making India's fiscal policy a rationalised and
growth oriented one.
The success of fiscal policy depends upon taking timely measures
and their effective administration during implementation.
Asked in Economics, Business Accounting and Bookkeeping
Explain the effects of fiscal policies on the economies production and employment?

Written by: Rohullah
Nowaid
Dated: October 30,
2009
Effects of Fiscal
Policies on Employment and Production
Undoubtedly, the fiscal policies
have tremendous effects on individual behavior and everyday
decisions made by households as well as businesses. A change tax
schedules has direct effect in cost of production and the
bottom-line for corporations or net income for individuals.
Fiscal
Policies and Employment
One of fiscal policy component is
taxation. An increase in taxes results in reduced net income.
Organizations look into profitability factors and value of labor
force in comparison to return on investment for use of technology
or outsourcing tasks otherwise performed internally or
domestically. Conversely, individuals may perceive an increase in
tax as a form of punishment, which can lead to promotion of more
black market labor (cash labor). Of course, a decrease in taxes may
lead to further domestic hiring and lesser black market labor.
Equally, it is important to note
that changes in taxation policies, as a part of the fiscal monetary
policy, can have significant effects on the intensity of employment
market, and overall efficiency and productivity. The fiscal
monetary policy of the government plays a crucial role on
employment factors.
Fiscal
Policies and Production
Interest rate is another component
of the fiscal policy. Adjusting the interest rate can have adverse
or favorable impact on production. To clarify, adverse in monetary
policy is not negative connotation, and favorable is not a positive
suggestion. In the monetary policy when market is collapsing too
fast the government may want to have an adverse result to bring the
market under control.
Change in interest rates alters
velocity of "cash." Meaning, when interest rates hike, cash becomes
scarce and credit tightens, as a result, monetary expansion becomes
limited and production decreases. On the other hand, when interest
rates decline, cash becomes more available and credit loosens, as a
result, monetary expansion becomes more vibrant and production
increases.