Fiscal policy as a means to    prevent Recession              BY        MANGESH PATIL       JAYESH BHANDARI        ANKUSH ...
DEFINITION Fiscal policy refers to the taxation, expenditure and  borrowing by the Government. It is the most important ...
Recession The fall in general price level is called ‘Recession’. This is a phase of a Business cycle which succeeds  the...
Illustrations of recessions Great depression(1929-1933) In US, Unemployment rate -3.2 to 25 %          GNP               ...
Process of Recession Peak Period in the Economy Wave of pessimism amongst investors regarding the  mechanism of profit m...
Graphical presentation of recession
Need of fiscal policy in tackling recession Superiority of fiscal policy to monetary policy Monetary policy depends upon...
Expansionary fiscal policy Discretionary fiscal policy Deliberate change in government expenditure and taxes  to influen...
GOVERNMENT EXPENDITURE TO THE RESCUE• Discretionary fiscal policy  Increase in expenditure by starting public works.  Ex.-...
Graphical presentation
Reduction in taxes Indirect effect Increase in disposable income and hence marginal  propensity to consume E.g. Governm...
Illustrations 1964-US president John F. Kennedy waived off $12  billion worth of tax liabilities. 1984-US prez Ronald Re...
Multiplier effect Tax multiplier   (Change in Taxes × MPC/ 1-MPC) Government expenditure multiplier   (1/1-MPC) Tax mul...
Other measures Encouraging personal savings and  investment(Retained profits reinvesting in the  economy) Encouraging en...
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Fiscal policy as a means to prevent depression

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Fiscal policy as a means to prevent depression

  1. 1. Fiscal policy as a means to prevent Recession BY MANGESH PATIL JAYESH BHANDARI ANKUSH MOGAL SHREEGANESH SARVE
  2. 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. 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. 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. 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. 6. Graphical presentation of recession
  7. 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. 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. 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. 10. Graphical presentation
  11. 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. 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. 13. Multiplier effect Tax multiplier (Change in Taxes × MPC/ 1-MPC) Government expenditure multiplier (1/1-MPC) Tax multiplier < Govt. Expenditure multiplier
  14. 14. Other measures Encouraging personal savings and investment(Retained profits reinvesting in the economy) Encouraging entrepreneurs
  15. 15. THANK YOU

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