Question

Government policies on taxation, public expenditure and public debt are commonly known as:

• A. Monetary Policy
• B. Industrial Policy
• C. Foreign Trade Policy
• D. Fiscal Policy

Answer 1

Answer:

D. Fiscal Policy

Understanding Fiscal Policy

• Fiscal Policy refers to the use of government spending, taxation, and public debt to influence the economy. It is a key instrument for governments to manage aggregate demand and achieve macroeconomic objectives.

• The term "Fiscal" is derived from the Greek word "fisk," meaning a state treasury or revenue.

Key Components of Fiscal Policy:

1. Taxation:

   • Government levies taxes on individuals and corporations to generate revenue. Taxes can be direct (e.g., income tax, corporate tax) or indirect (e.g., Goods and Services Tax - GST, customs duty).

   • Changes in tax rates directly impact disposable income, consumer spending, and business investment. For instance, lower taxes can stimulate demand.

2. Public Expenditure (Government Spending):

   • This includes government spending on infrastructure (roads, bridges), public services (education, healthcare), defense, and welfare programs.

   • Increased government spending directly boosts aggregate demand and can stimulate economic growth, especially during recessions.

3. Public Debt (Government Borrowing):

   • When government expenditure exceeds its revenue (tax and non-tax), it results in a budget deficit, which is financed by borrowing from domestic or external sources. This borrowing creates public debt.

   • Government borrows by issuing bonds, treasury bills, etc. The level and management of public debt are crucial for long-term economic stability.