FISCAL POLICY
The use of deliberate changes in government expenditure and / or taxes to achieve certain national economic goals is called Fiscal Policy.
==? To Stimulate Economy === Expenditures are increased ? === Expansion Tool.
==? To Slowdown Economy === Taxes are imposed === Contraction Tool.
Objectives of Fiscal Policy:
1. Removing deflationary gap.
2. Fiscal policy during inflation, to control it.
3. Equilibrium in the Balance of Payments: increase taxes on imports, and decrease on exports.
4. Stimulate economic growth.
Principle Weapons of Fiscal Policy:
1. Automatic OR Built-in Stabilizers:
Are those which contribute to keep the economic system in balance without human control ==?These controls are built-in to the economy and so are called automatic or built-in stabilizers:
A. Progressive Income Tax: Reduction in income taxes, increases disposable personal income.
2. Demand Side Fiscal Policy:
The expansion and contraction of fiscal policy can be summed up and brought under two approaches i.e. Supply Side Fiscal Policy and Demand Side Fiscal Policy.
The goal is to raise aggregate demand to full employment level and the objective can be achieved by:
a. Increasing Government Expenditure.
b. And Through Reducing Taxis.
During inflation aggregate demand is decreased and contractionery measures are used:
a. Government Expenditures are reduced.
b. Taxes are increased.
3. Supply Side Fiscal Policy: ...