Objectives and Measures of Fiscal Policy

Introduction Fiscal policy is defined as the policy under which the government uses the instruments of taxation, public spending and public borrowings to achieve various objectives of economic policy. The objectives of fiscal policy are as follows: Economic Stability Economic Growth Full Employment Attaining External Equilibrium Reducing Inequalities Price Stability Fiscal policy is used as a tool to curb inflation. During inflation, contractionary fiscal policy is being used to reduce aggregate demand and hence to control demand –pull inflation. Fiscal policy is an important tool to achieve economic stability. Deficit budget policy and reduction in tax rates are to be followed during depression. To create employment, the government should adopt expansionary fiscal policy. Raising the rate of economic growth with equity is the prime objective of fiscal policy. For economic development of developing country, the role played by fiscal policy is imperative. It is done through promotion of savings, balanced regional growth, control of inflation, reducing trade deficit, etc. The limitations of fiscal policy are: small size of fiscal measures (in developing country), it is ineffective as anti-cyclical measures and administrative delay.

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  • Q1

    State any two importance of fiscal policy.

    Marks:2
    Answer:

    Fiscal policy is regarded as an important instrument of economic policy.
    1. Fiscal policy is required to control inflation.

    2. It is also important in order to achieve economic stability and to accelerate the pace of economic development

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  • Q2

    What do you mean by fiscal deficit?

    Marks:2
    Answer:

    It is the difference between total budgetary expenditure and the sum of revenue and capital receipts excluding borrowing.

    Fiscal Deficit = Total Budgetary Expenditure – Revenue Receipts- Capital Receipts excluding borrowings

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  • Q3

    What are the various instruments of fiscal policy?

    Marks:1
    Answer:

    The various instruments used under fiscal policy are:

    • Taxation policy
    • Public Expenditure policy
    • Public debt policy

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  • Q4

    Define Fiscal policy.

    Marks:1
    Answer:

    It is the policy measure under which government uses tools like expenditure, taxation and revenue policy to achieve various objectives of economic policies.

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  • Q5

    What do you mean by government budget?

    Marks:1
    Answer:

    Government budget is a systematic financial statement which shows the estimated government expenditure and receipts for the financial year or fiscal year.

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