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Some of the major instruments of fiscal policy are as follows: The budget of a nation is a useful instrument to assess the fluctuations in an economy.
Different budgetary principles have been formulated by the economists, prominently known as: Let us briefly explain them: The classical economists propounded the principle of annually balanced budget.
The reasons for their reacceptance of this principle are as under: However, this principle is subject to certain objections. These objection are as under: In practice, a balanced budget can be expansionary. Such a budget implies budgetary surpluses in prosperous period and employing the surplus revenue receipts for the retirement of public debt.
During the period of recession, deficit budgets are prepared in such a manner that the budget surpluses during the earlier period of inflation are balanced with deficits. The excess of public expenditure over revenues are financed through public borrowings. The cyclically balanced budget can stabilize the level of business activity.
During inflation and prosperity, excessive spending activities are curbed with budgetary surpluses while budgetary deficits during recession with raising extra purchasing power. This policy is favored on the following account: Fully Managed Compensatory Budget: This policy implies a deliberate adjustment in taxes, expenditures, revenues and public borrowings with the motto of achieving full employment without inflation.
It assigns only a secondary role to the budgetary balance. It lays down the emphasis on maintenance of full employment and stability in the price level. With this principle, the growth of public debt and the problem of interest payment can be easily avoided.
Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly effect the changes in disposable income, consumption and investment. An anti- depression tax policy increases disposable income of the individual, promotes consumption and investment.
Obviously, there will be more funds with the people for consumption and investment purposes at the time of tax reduction. This will ultimately result in the increase in spending activities i.
In this regard, sometimes, it is suggested to reduce the rates of commodity taxes like excise duties, sales tax and import duty. As a result of these tax concessions, consumption is promoted.
Economists like Hansen and Musgrave, with their eye on raising private investment, have emphasized upon the reduction in corporate and personal income taxation to overcome contractionary tendencies in the economy.
Now, a vital question arises about the extent to which unemployment is reduced or mitigated if a tax reduction stimulates consumption and investment expenditure. In such a case, reduction of unemployment is very small.Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply and interest rates and is .
Fiscal policy is the use of government revenue and The two main tools of fiscal policy are taxes and spending. A contractionary financial policy may kick in to prevent inflation when that. Fiscal policy tools have several advantages.
Spending tools enable services such as defense to benefit everyone in the country and build infrastructure that propels growth. Spending tools also ensure a minimum standard of living for the residents.
Fiscal policy is a broad term used to refer to the tax and spending policies of the federal government. Fiscal policy decisions are determined by the Congress and the Administration; the Federal Reserve plays no role in determining fiscal policy.
Fiscal Policy how governments adjust taxes and spending to moderate the economy. Fiscal Policy is the sister strategy to monetary policy, through which a central bank influences a nation's money.
Fiscal policy is therefore the use of government spending, taxation and transfer payments to influence aggregate demand. These are the three tools inside the fiscal policy toolkit.
So, when the government uses fiscal policy to stimulate aggregate demand during a recession, economists call this expansionary fiscal policy.
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|Fiscal Policy||The Federal Reserve uses a variety of policy tools to foster its statutory objectives of maximum employment and price stability.|