Aggregate demand refers to the overall demand for services and goods across a certain country. Fiscal boost means as incomes fall in a recession the impact of falling incomes for the better off is softened as they pay proportionately lower taxes, and retain more post-tax income. There are plenty of powerful weapons left in the fiscal-policy arsenal. Congressional Research Service explains, when the government spends an extra dollar, someone receives it. Expansionary fiscal policy cutting taxes and increasing G will cause an increase in the budget deficit which has many adverse effects. Even when the Fed funds rate or its equivalent is far from its zero lower bound at the beginning of a recession, the effects of monetary policy take place with a significant lag partly because of the time it takes to adjust investment plans , while there is reason to think that consumption could be stimulated quickly through the issuance of national lines of credit. But due to resource constraint, the extent of deficit financing again rose to 14 per cent and 16 per cent of total plan resources respectively.
This leads to huge numbers in unemployment causing a gap in aggregate demand no one is able to buy anything because they don't have a job to afford things , then firms cannot produce more because no one is buying anything. If it fails to do so, then there could be huge problems for the economy. In doing so, the government aims to find a balance between lowering unemployment and reducing the inflation rate. Merits or Advantages of Fiscal Policy of India : Following are some of the important merits or advantages of fiscal policy of Government of India: i Capital Formation: Fiscal policy of the country has been playing an important role in raising the rate of capital formation in the country both in its public and private sectors. Resources have been mobilized from rich class to poor by way of progressive taxes, wealth tax, corporation tax and capital gain tax etc. Moreover in these economies because of huge tax evasion, it is difficult to earn revenue from taxes.
Inflation means the increase in price of of goods without an improvement in money. If this continues, workers might lose their jobs. Reduction in Inequality of Income and Wealth: -Fiscal Policy of the country has been making constant endeavour to reduce inequality of income and wealth. Examples include public works projects, , and food stamps. Main objectives of taxation policy in India includes: a Mobilisation of resources for financing economic development; b Formation of capital by promoting saving and investment through time deposits, investment in government bonds, in units, insurance etc. When a government uses fiscal policy irresponsibly, the cost of goods and services can balloon out of control.
It involves changing the allocations and levels of government expenditures and taxes. Export Promotion: - Export has been encouraged by way of providing subsidies, concessions, tax exemptions, cash subsidies etc. An effective fiscal policy is composed of policy decisions relating to entire financial structure of the government including tax revenue, public expenditures, loans, transfers, debt management, budgetary deficit, etc. Naturally private sector cannot take the responsibility to develop these industries. Low Inflation Rates One of the largest advantages of monetary policy is that it helps to promote stable prices which are useful for ensuring that inflation rates stay low throughout the world. Expansionary policy in a period of falling tax revenue could lead to deficit spending. Trade unions may also actually reduce the firm's costs by acting as a channel for communication between employers and employees - it is likely to be cheaper for the firm to negotiate with one organisation rather than with each employee individually.
Import duty on raw material and capital goods used for production of goods meant for export has also reduced with a view to encourage exports. A small amount of inflation is healthy for a growing economy as it encourages investment in the future and allows workers to expect higher wages. To arrange an optimum utilisation of resources; 5. So they usually get spoilt being called 'the little emperors. In a contractionary monetary policy, interest rates are higher.
This policy promotes employment and improves economic output. He used contractionary fiscal policy, and cut government spending. This may also lead to an aging population because of less children. Another advantage is that tax cuts on wages encourages people to work and therefore, shift the long run aggregated supply curve to the right. During periods of economic growth, tax yields rise, and spending on welfare payments fall, pushing the public finances towards a surplus. Price Level Targeting — This strategy targets the Consumer Price Index instead of inflation. Moreover, this can be a complicated and vague topic for those who are not familiar with what it is all about.
In this part fiscal policy remains unaffected. The Cons of Fiscal Policy 1. Is it right to make a group of people who are likely to be amongst the poorest in society, even poorer, while at the same time making the rich richer through tax cuts? Monetary policy helps stabilize prices, which decreases inflation, according to Economics Help. Others also claim that even if the banks are given lower interest rates by the Central Bank when they borrow money, some banks might have the funds. Definition of Fiscal Policy 2.
They say it frees up businesses to hire more workers to pursue business ventures. Say for example, the government spends too much money on things, it will have to find a way to pay all the bills anway, so they will have to borrow money and in doing so there will be a budget deficit spending more than you have , inflation, and a squeeze in the funds available for the private sector if the government enters the private sector to get money, ex. Fiscal policy therefore offers the most effective tool for not only stimulating economic growth, but also curbing inflation. It will not be useful during global recession. In this situation, government must borrow by selling long term bonds or short term bills. Their fiscal policy reflects the priorities of individual lawmakers.