Question

State and explain instruments of fiscal policy.

State various instruments of fiscal policy.

What are the instruments of Fiscal policy? Name any two.

Discuss various instruments of fiscal policy.

Name any two instruments of fiscal policy.

Answer 1

Fiscal policy is implemented through fiscal instruments, also called ‘fiscal tools’ or fiscal levers’. Government expenditure, taxation, and borrowing are the fiscal tools.

1. Taxation:

• Taxes transfer income from the people to the government.
• Taxes are either direct or indirect.
• An increase in tax reduces disposable income.
• So taxation should be raised to control inflation.
• During the depression, taxes are to be reduced.

2. Public Expenditure:

• Public expenditure raises the wages and salaries of the employees and thereby the aggregate demand for goods and services.
• Hence, public expenditure is raised to fight the recession and reduced to control inflation.

3. Public borrowing debt:

• When the government borrows by floating a loan, there is the transfer of funds from the public to the government.
• At the time of interest payment and repayment of public debt, funds are transferred from government to the public.

Answer 2

a. Fiscal Instruments Related to Government Expenditure

1. Expenditure on public works programs such as constructing roads, dams, bridges, etc.
2. Expenditure on education and public welfare programs.
3. Expenditure on the defense of the country and the maintenance of law and order.
4. Expenditure on various types of subsidies to producers to encourage production.

b. Fiscal Instruments related to Financing of Government Expenditure or Public (Government) Revenue

1. Taxes: Taxes are compulsory payments to the government according to the prescribed laws.
2. Indirect Taxes: Goods and services are subject to indirect taxes. It is possible for other people to bear the cost of these taxes. Indirect taxes include things like sales tax, excise tax, customs duty, and so forth.
3. Public Debt or Borrowing: The term “public debt” refers to any loans or borrowings made by the government from the general people.
4. Deficit Financing: Issuing additional currency to cover a budgetary deficit is known as “deficit financing” in India. It makes more money available to the economy.