fiscal policy be ppt
TRANSCRIPT
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F I SCAL POL ICY
Presented By- Pinakin Patel Presented to- Prof. Tejal Shah
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Government spending and taxation to achieve
full employment without inflation
What is a Fiscal Policy?
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FISCAL POLICY-MEANING
� The word fisc means µstate treasury¶(FUND) andfiscal policy refers to policy concerning the use of µstate treasury¶ or the govt. finances to achieve the
macroeconomic goals.� ³any decision to change the level, composition or
timing of govt. expenditure or to vary the burden,the structure or frequency of the tax payment is
fiscal policy.´
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OBJECTIVES OF FISCAL POLICY
It has 2 major objectives:
i. GENERAL obj-. aimed at achieving
macroeconomic goals
ii. SPECIFIC obj-. relating to any typical
problems of an economy
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FISCAL POLICY AND
MACROECONOMICG
OALS
y Economic Growth: By creating conditions for increase in
savings & investment.
yEmployment: By encouraging the use of labour-absorbingtechnology
y Stabilization: fight with depressionary trends and
booming (overheating) indications in the economy
y
Economic Equality: By reducing the income and wealthgaps between the rich and poor.
y Price stability: employed to contain inflationary and
deflationary tendencies in the economy.
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INSTRUMENTS OF FISCAL POLICY
Budgetary surplus and deficit
Government expenditure
Taxation- direct and indirect
Public debt
Deficit financing
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To Reduce Inflation«
Decrease Government Spending
Tax Increases
FISCAL POLICY AND THE AD-AS MODEL
Contractionary Fiscal Policy
Expansionary Fiscal Policy
To Reduce Unemployment« Increase Government Spending
Tax Reductions
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Introduction to The Spending Multiplier:
The impact policies have on the economy is like a ripple effect
Assuming that price is constant, multiplier effect is the magnified
impact of a spending change on aggregate demand
Marginal Propensity to Consume answers the question: ³If income
increases this amount, how much extra will be spent on domesticgoods and services?´
MPC = change in consumption on domestic items
change in income
Marginal Propensity to Withdraw is the effect on withdrawals of a
change in income
MPW = change in total withdraws
change in income
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BENE ITS O ISCAL POLICY
Two benefits as a stabilization tool: its regional focus, and the
direct impact it has on spending
Regional Focus:
Discretionary fiscal policy can focus on particular regions where, for
example, unemployment rates are the highest or inflation is at its worst
Automatic stabilizers have the greatest effect in regions that need them
the most
Impact on Spending:
Fiscal policy has a more straightforward impact when altering
government purchases than monetary policy, since the government
itself initiates the change
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DRAWBACKS OF FISCAL POLICY
Delays:
R ecognition Lag ± the amount of time it takes policy-makers to realize that apolicy is needed
Decision Lag ± the amount of time needed to formulate and implement anappropriate policy
Impact Lag ± the amount of time between a policy¶s implementation and itshaving an effect on the economy
Political Visibility:
Voters are likely to respond more favourably to increases in governmentpurchases and cuts in taxes
Public Debt:
Public Debt - the total amount owed by the federal government as a result of its past borrowing
Public Debt Charges ± are the amounts paid out each year by the federalgovernment to cover the interest charges on its public debt
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IMPACT OF FISCAL POLICY
Balanced budget is the situation where a government¶s expenditure and
revenues are equal
A budget surplus is when a government¶s revenues exceed expenditures
A budget deficit is when a government¶s expenditure exceeds revenues
Size of a government¶s surplus or deficit in relation to the economy¶s
overall GDP gives clues to what type of discretionary fiscal policy inoperation, as well as the automatic stabilizers
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FISCAL POLICY GUIDELINES
3 principles that guide government fiscal policy:
1) Annually balanced budgets
2) Cyclically balanced budgets
3) Functional finance
Annually balanced budget is the principle that government revenues andexpenditures should balanced each year
Critics of fiscal policy say annually balanced budget are not necessary for
the society and state it as faulty reasoning
Cyclically balanced budget is the principle that government revenues andexpenditures should balanced over the course of one business cycle
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RECENT FISCAL POLICY
Government revenues and expenditures don¶t need to balance
every year but over one business cycle
Function finance is the principle that government budgets
should be geared to the yearly needs of the economy
Defenders of functional finance are those who believe fiscal
policy is a powerful stabilization took
The choice of fiscal policy guideline depends on the
government¶s belief in fiscal policy as an effective took for
stabilizing the economy
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Government deficits were highest during recessions during the
early 1980s and early 1990s
Tax revenues fell with slumping incomes during that time as a
result of the automatic stabilizers
Discretionary expansionary policy also contributed since federal
government increased purchases of goods and services to counteract
the effects of sagging outputs and incomes
1990s downturn caused a concern over increased public debt and
lowered confidence in discretionary fiscal policies to counteract a
recession
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