Document1 - Microsoft Word inter Mailings Review View Insert References Page Layout Cambria (Headin 10 AA 13 - E. 21 . NE Heading 2 Subtle Em.. Subtitle 11 Normal Title I No Spaci... Heading 1 A. VA U-ahe x, X Styles Font Paragraph A case study: An important way the government affects the economy is through the adoption of appropriate fiscal policy. The fiscal policy refers 1o taxation and expenditure decisions of the government Before Keynes it was bell=ieved that the government budget should preferabily be balanced, at is. Lexenua collected through taxes should be equal to the expenditure made by the government. Kennes showed that balanced budget is not good under all circumstances. He advocated that times of depression, deficit budget should be made to get the economy out ofit and to climinate involuntary unemployment. In case of deficit budget the govemment expenditure exceeds revenue collected through taxes. The budget deficit arises when the government increases its expenditure without raising taxes or it arises when taxes are reduced without cutting back an expenditure. Therefore, the policy of budget deficit represents expansionary fiscal policy. The budget deficit raises aggregate demand Bnd leads to the increase in national income and employment. To meet the budget deficit, the government borrows from the banks and the public and pays folerest To them. This raises debt burden of the government. The borrowing by the government increases the demand for loanable funds and leads to rise in rate of interest. The higher interest rate discourages private investment. It is therefore claimed that government borrowing to finance budget deficit acowide oursemea private investment so that net effect of budget deficit on expansion n gutrul and employment is small. We will explain in detail in a subsequent chapter how far this crowding out effect is significant. However to avoid borrowing and rise in public debt the alternative way to finance the budget deficitis printing of money by the government. The danger of financing budget deficit through printing of money is that it may lead to inflation in the economy. The implications of different ways of financing budget deficit will be discussed in detail in a later chapter on the contrary, when there is high inflation in the Economy the government can check it by reducing its expenditure or raising taxes and in this way make a surplus budget. This will tend to. teduce aggregate demand which will help controlling inflation. Thus fiscal policy is an important instrument used by the government to change the level of egensgate demand and thereby affect income, employment and prices and RomWhich Pionis talking about? ds: 394 English (India) be here to search ji * Eee W