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Macro Economics

Notes Fiscal Policy

Fiscal policy is an additional method to determine public revenue and public expenditure. In the
recent years importance of fiscal policy has increased due to economic fluctuations. Fiscal policy is
an important instrument in the modern time. According to Arther Simithies fiscal policy is a
policy under which government uses its expenditure and revenue programme to produce desirable
effects and avoid undesirable effects on the national income, production and employment.

Supply Side Policies

Supply side economics is the branch of economics that considers how to improve the productive
capacity of the economy. It tends to be associated with Monetarist, free market economics. These
economists tend to emphasise the benefits of making markets, such as labour markets more
flexible. However, some supply side policies can involve government intervention to overcome
market failure

Supply Side Policies are government attempts to increase productivity and shift Aggregate
Supply (AS) to the right.
Benefits of supply side policies are:

Lower Inflation: Shifting AS to the right will cause a lower price level. By making the
economy more efficient supply side policies will help reduce cost push inflation.

Lower Unemployment: Supply side policies can help reduce structural, frictional and real
wage unemployment and therefore help reduce the natural rate of unemployment.

Improved Economic Growth: Supply side policies will increase the sustainable rate of
economic growth by increasing AS.
Improved Trade and Balance of Payments: By making firms more productive and
competitive they will be able to export more. This is important in light of the increased
competition from China and Oriental nations.

Direct Control

The government affects business transactions and activities of an economy through a system of
controls and regulations. Fiscal and monetary policies constitute 'indirect' or 'general' controls;
they affect the overall aggregate demand of the economy. In contrast, there may be 'direct' or
'physical' controls; they affect particular choices of consumers and producers. Such controls are
in the form of licensing, price controls, rationing, quality control, monopoly control, regulation
of restrictive trade practices, export incentives, import duties, import-export and exchange
regulations, quotas, authorisation and agreements, anti-hoarding and anti-smuggling schemes,
etc. It is this complex and varied set of direct controls, which is often, referred to the term
Physical Policies. Unlike fiscal and monetary policies, which affect the entire economy, physical
policies tend to affect the strategic point of the economy; they are specially oriented and
discriminatory in nature. They are designed and executed to overcome specific shortages and
surpluses in the economy. Thus, the basic purpose of physical policies is to ensure proper
allocation of scarce resources like food, raw materials, consumer goods, capital equipment,
basic facilities, foreign exchange, etc.

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