Macroeconomics Assignment

Macroeconomics Assignment II
Monetary
outcomes
policy,
Fiscal
policy
and
equitable
Vinoth Kumar R
Roll No. 1401114
Section B
The objectives of fiscal policy differ from country to country according to the
level of economic advancement. The role of fiscal policy in developed
countries is to maintain the level of full employment, and to stabilize the rate
of growth. While in an underdeveloped and developing economy, the role of
fiscal policy is to accelerate the rate of capital formation and investment,
change the pattern of investment, maintaining adequate supply of essential
consumer goods on the one hand, and capital goods on the other,
encourage, the investment activities into socially desirable channels,
maintaining price stability, and above all to make the distribution of national
product just and equitable.
These objectives of fiscal policy may come in conflict with one
another. For example, the objective of high rate of economic growth may
come in conflict with the distributive objective of the fiscal policy. Likewise,
equitable distribution of income and wealth may adversely affect the
inducement to produce more and thus retard the rate of economic growth.
Thus, reconciliation has to be achieved between these conflicting objectives
of fiscal policy. The main objectives of fiscal policy in a developing economy
may be summarized as follows:
Mobilization of Resources: Most of the developing countries are caught in
the vicious circle of poverty. Prof. Higgins remarks that the road to the
growth of developing economies is paved with vicious circles. Vicious circle
of poverty refers to the circular constellation of forces, tending to act and
react in such a way as to keep a poor country in a state of poverty. The most
important objective of fiscal policy in a developing country should be to
break this vicious circle of poverty. In order to achieve the above objective it
is of utmost importance to increase the rate of investment and capital
formation to accelerate the rate of growth. The government may resort to
voluntary and forced saving to collect enough resources for investment.
Incremental saving ratio, i.e. the marginal propensity to save, can be
maximized by a number of methods which may include direct physical

controls, increase in the rates of existing taxes, imposition of new taxes,
operating surplus of the public enterprises, public borrowings, deficit
financing, etc.
Acceleration of Economic Growth:
The aim of fiscal policy in a
developing country is to accelerate the rate of growth so that the real
national income of the country may increase in the long run. The
government, through its taxation policy, public borrowings, deficit financing,
etc., can provide incentives for saving and investment.
To Minimize the Inequalities of Income and Wealth:
To maintain the
equality of income and wealth is not only an objective of economic growth,
but a precondition to it. The government, therefore, should formulate its
fiscal policy in such a manner so that it may reduce the inequalities of
income and wealth. A mere increase in national income does not necessarily
promote economic growth. It is all the more essential to reduce the existing
inequalities of income and wealth. Extreme inequalities create political and
social discontentment and generate instability in the economy. The following
measures can be taken to reduce the inequalities of income and wealth:
(i) Progressive taxes may be imposed on the rich people so that the
unnecessary consumption expenditure is curtailed.
(ii) The poorer section of the society should be exempted from taxes.
(iii) Luxury goods should be highly taxed and the proceeds so collected be
diverted to productive investment activities.
(iv) The government must spend more on the social services or on the items
which benefit the poor people most.
(v) The fiscal policy must discourage unearned income.
In brief, the problem of reducing inequalities of income and wealth may be
solved through redistributive public expenditure and redistributive tax policy.
To Increase Employment Opportunities:
One
of
the
important
objectives of fiscal policy in a developing country is to increase the
employment was regarded as the most important objective under the
influence of Keynes. Prof. Lewis is of the opinion that without providing full
employment to the available manpower, the objective of economic growth
will remain incomplete. The government through her fiscal policy can help in
creating and promoting an atmosphere where people may get employment
opportunities.
Taxation Policy: Taxation policy of the government can play a very

important role in raising the level of employment in a developing economy.
Unemployment is the result of low propensity to consume. The government
can resort to redistributive tax policy to remove the deficiency in the
propensity to consume. While the rich people have a low propensity to
consume the poor have a very high propensity. The government can impose
heavy takes on the rich people and the proceeds of these taxes may be
distributed among the poor. Progressive taxes on the rich persons are
socially desirable and economically advantageous.
References:
Economics, By Anderton
http://www.imf.org/external/np/seminars/eng/2013/fiscalpolicy/

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Macroeconomics Assignment II

maximized by a number of methods which may include direct physical

Taxation Policy: Taxation policy of the government can play a very

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