Question

State and explain instruments of fiscal policy.

Answer 1

Fiscal Instruments:
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 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 debt:

• When 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.