Fiscal policy as a means to prevent depression

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  • 1. Fiscal policy as a means to prevent Recession BY MANGESH PATIL JAYESH BHANDARI ANKUSH MOGAL SHREEGANESH SARVE
  • 2. DEFINITION Fiscal policy refers to the taxation, expenditure and borrowing by the Government. It is the most important instrument of government intervention in the economy. Three basic objectives –1. Ensuring price stability2. High output and employment level3. Economic growth
  • 3. Recession The fall in general price level is called ‘Recession’. This is a phase of a Business cycle which succeeds the phase called ‘Peak or Maturity’. This phase is characterized by following points- High rate of unemployment Substantial decrease in GNP Fall in prices Underutilised excess capacity
  • 4. Illustrations of recessions Great depression(1929-1933) In US, Unemployment rate -3.2 to 25 % GNP –Fall by 30 % Recessionary situations in 1964,1984 Japan – 1990s period of sustained recession (huge amount of savings) World recession 2008 (sub prime crisis) Eurozone crisis
  • 5. Process of Recession Peak Period in the Economy Wave of pessimism amongst investors regarding the mechanism of profit making in the market. Lesser investments Low aggregate expenditure and demand Low national output Cyclical unemployment Depression
  • 6. Graphical presentation of recession
  • 7. Need of fiscal policy in tackling recession Superiority of fiscal policy to monetary policy Monetary policy depends upon interest rates Unemployment and pessimism in economy Direct effect on income, employment, expenditure and output. ‘Attack is the best defense’-Maintain full employment with gradually rising price level
  • 8. Expansionary fiscal policy Discretionary fiscal policy Deliberate change in government expenditure and taxes to influence national output and prices Non-discretionary fiscal policy Automatic stabilizers-Built-in tax or expenditure mechanism which automatically increases aggregate demand in recessionary times.1. Personal income tax2. Corporate income tax3. Transfer payments(unemployment compensation)4. Welfare benefits
  • 9. GOVERNMENT EXPENDITURE TO THE RESCUE• Discretionary fiscal policy Increase in expenditure by starting public works. Ex.- Building roads, dams, ports, irrigation works, electrification of new areas etc. Two effects Direct effect:- Increase in income of material suppliers & labors Indirect effect:- Increase in disposable income and consumption expenditure -Greater output, income and employment - increase in transaction demand for money
  • 10. Graphical presentation
  • 11. Reduction in taxes Indirect effect Increase in disposable income and hence marginal propensity to consume E.g. Government reduces Rs. 200 crores of tax people have Rs.150 crores as disposable income (MPC=.75) Keepin Govt. Expenditure constant, an upward shift in C+I+G curve. Decreased taxes =Increase in income, output, employment
  • 12. Illustrations 1964-US president John F. Kennedy waived off $12 billion worth of tax liabilities. 1984-US prez Ronald Reagen ordered reduction in taxes
  • 13. Multiplier effect Tax multiplier (Change in Taxes × MPC/ 1-MPC) Government expenditure multiplier (1/1-MPC) Tax multiplier < Govt. Expenditure multiplier
  • 14. Other measures Encouraging personal savings and investment(Retained profits reinvesting in the economy) Encouraging entrepreneurs
  • 15. THANK YOU