Understanding Fiscal Policy: Objectives and Instruments

Understanding Fiscal Policy: Objectives and Instruments

Introduction

In this video, Minisetti discusses the concept of fiscal policy, which involves government strategies regarding expenditure and revenue to influence economic outcomes such as production, employment, and national income.

What is Fiscal Policy?

  • Definition: Fiscal policy refers to the government's use of its expenditure and revenue programs to create a positive impact on production, employment, and national income.
  • Government Expenditures: Examples include spending on roads, education, and public health.
  • Revenue Generation: The government collects income through taxes.

Objectives of Fiscal Policy

  1. Full Employment:

    • The government increases expenditure on public services to create jobs.
    • Reduces taxes to incentivize private sector investment and job creation.
  2. Price Stability:

  3. Reduction in Economic Inequalities:

    • Higher taxes on the wealthy are imposed to fund welfare programs for the underprivileged.
  4. Economic Development:

Instruments of Fiscal Policy

  1. Taxation:

    • During inflation, taxes are increased to reduce demand and stabilize prices.
    • In deflation, taxes are reduced to stimulate demand and increase prices. For a deeper understanding of how taxation fits into the larger financial landscape, check out Understanding Financial Instruments: A Comprehensive Overview.
  2. Government Expenditure:

    • Government spending on public health, education, and social security generates income and increases aggregate demand.
    • Expenditure is adjusted based on market conditions (e.g., reduced during economic booms, increased during depressions).
  3. Public Debts:

Conclusion

Minisetti wraps up the discussion by summarizing the importance of fiscal policy in managing economic conditions and its role in promoting overall economic health.

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