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Unit-27: Monetary Policy

6. Less Bank Money: In such countries monetary policy is also not successful because bank Notes
money is a small ratio of total money. As a result of which, central bank is incapable of
controlling credit in an effective manner.
7. Money not Deposited with bank: Prosperous people do not deposit money with banks
instead use them for jewellery, gold, real assets, speculative consumption etc. Such activities
encourage inflationary pressures because they do not come under the control of monetary
officer.

Task Express your thoughts in relation to expansionary monetary policy.

27.7 Fiscal Policy

1. Meaning

By fiscal policy is meant use of taxation or public expenditure by the government for stabilisation or
growth. "By fiscal policy we refer to government actions affecting its receipts and expenditures which
we ordinarily take as measured by the government’s net receipts, its surplus or deficit." Government
may balance undesirable changes in personal expenses and investment by anti-cyclical changes in
public expenditure and taxes. Arthur Smiths has defined fiscal policy like this, “A policy under which
the government uses its expenditure and revenue programmes to produce desirable effects and avoid
undesirable effects on the national income, production and employment. Though the last objective
of fiscal policy is long term stabilisation of the economy, still this objective may be achieved only by
taking care of economic ups and downs. In this context Otto Eckstein has defined fiscal policy like
this, “Changes in taxes and expenditures which aim at short run goals of full employment and price-
level stability."

2. Objectives of Fiscal Policy

Below mentioned are the objectives of Fiscal Policy:
1. To attain and maintain full employment,
2. To keep the price level stable,
3. To stabilize the growth rate of the economy,
4. To maintain balance in the Balance of Payment,
5. To increase the economic development of under developed countries.

3. Instruments of Fiscal Policy

By the medium of change in government expenditure and taxation fiscal policy strongly influences
national income, employment, production and prices. Increase in public expenditure during depression
increase total demand for goods and services and does a huge growth in income by the way of multiplier
process, while the influence of reduction in taxes is that disposable income increases as a result of
which people’s consumption and investments increase. At the other side during inflation decrease
in public expenditure decreases total demand, national income, employment, production and prices
whereas increase in taxes reduces disposable income and consequently reduces consumption and

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