Fiscal Policy plays a pivotal role in shaping the economic landscape of a nation. It serves as a crucial tool wielded by government to influence economic activity, price stability, and overall financial well-being. For aspirants preparing for the Union Public Service Commission (UPSC) examinations, grasping the intricacies of monetary policy is indispensable.
Meaning of Fiscal Policy
Fiscal policies refers to the government’s use of taxation and public spending to influence the economy. It is one of the primary tools governments employ to manage economic activity and achieve specific macroeconomic objectives such as price stability, full employment, and economic growth.
The government implements it through its budgetary decisions, including taxation, public expenditure, and borrowing. It often uses it in conjunction with monetary policy, which the central bank controls by managing money supply and interest rates.
Together, fiscal and monetary policies aim to achieve stable economic growth and maintain price stability.
Tools of Fiscal Policy
Government Spending:
Government spending refers to the expenditures made by the government on goods and services. These expenditures can include spending on infrastructure projects (such as roads, bridges, and public transportation), education, healthcare, defense, public safety, social welfare programs, and more. Government spending plays a crucial role in stimulating economic activity and influencing the overall level of aggregate demand in the economy.
Transfer Payments
The government makes transfer payments to individuals or other levels of government without expecting goods or services in return. These payments typically include various social welfare programs such as unemployment benefits, social security, food stamps, housing assistance, and healthcare subsidies.
taxes
Taxes are compulsory payments levied by the government on individuals, businesses, and other entities to fund public expenditures and achieve various policy objectives.
Expansionary and Contractionary Policy:
Expansionary Fiscal Policy:
This involves lowering taxes and/or increasing government spending to stimulate economic activity during times of recession or economic downturn. By increasing disposable income (through tax cuts) or injecting money into the economy (through spending), the government aims to boost aggregate demand, leading to increased consumption, investment, and employment.
Contractionary Fiscal Policy:
In contrast, contractionary fiscal policy involves raising taxes and/or decreasing government spending to cool down an overheating economy, typically during periods of high inflation. By reducing disposable income or cutting back on government spending it decrease aggregate demand, thus helping to curb inflationary pressures.
Difference between Monetary and Fiscal Policy
Also learn Monetary policy from here.
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