meaning of fiscal policy

the policy formulated in relation to the government revenues with the view of enhancing the economic development by increasing, employment and leading the whole economy forward are known as fiscal policies. since development of monetary and capital markets of the developing and poor countries is negligible, the monetary policy undertaken by the central bank for the economic development cannot be successfully implemented. for this the government has to implement appropriate policy. with this as the central view and to improve the state of the economic, the government will formulate fiscal policy.so , the policy undertaken by the government for the management of government revenue, expenditure and loan to enhance economic stability and economic development in the economy is known as fiscal policy. the main objective of this is to establish economic stability in the economy by increasing output and employment as monetary policy undertaken by the central bank. the government undertakes various fiscal policies in order to make economic policies successful. various revenues, public expenditures and loans come under the fiscal policy undertaken by the government. with proper adjustment of such fiscal factors, output, employment, income, etc. can be increased in the economy.

significance or omportance of monetary policy in developing countries

in underdeveloped and developing countries many factors hinder the economic growth. the government formulates and implements various policies to remove such hurdles for maintaining equilibrium in the economy. among these policies, with the help of monetary policy the government leads the economy towards economic growth by providing required acceleration. to achieve some definite objectives through monetary policy, the central bank guides the expansion and contraction of the quantity of money and credit towards appropriate direction. that is, the central bank will control inflation and deflation as required through monetary policy.
there will be a great importance of monetary policy in the underdeveloped or developing countries. in such countries, various types of economic problems can be solved through monetary policy. this is because the economy of underdeveloped countries are badly affected by the problems of inflation and deflation. in such a situation, hurdles will occur in the sectors like production, employment, income and economic growth. all these problems in the country can be solved through monetary policy. the importance of monetary policy in the underdeveloped and developing countries can be presented as follows:
1. development of banking and financial institutes
the main objective of monetary policy in underdeveloped and developing countries is to develop banking and financial instituter. in such countries due to lack of banks and financial institutes, the people won't be used to banking. so, all of their income will be used in consumption expenditure. this won't have any encouragement in saving. without saving investment also won't be possible. it is absolutely necessary for the development of such institutes in the country which are requirements through monetary policy. the central bank of the country which is in the from of monetary official develops banks and financial institutes in the country and also frees the public from unnecessary exploitation from creditors charging high rates.
2. monetization of the rural sectors
high percentage of people in underdeveloped countries live in rural sectors. almost all people of these sectors carry out their transactions on the basis of barter system. so,monetary system won't be developed in the rural sectors. monetization of the rural sector through monetary policy will help in the economic growth. monetary policy will help to carry out activities in monetary system by removing the barter system.
3. development of organized money market
in underdeveloped countries there will be lack if organized money market. money market will be controlled by big and rich money-lenders. these classes will exploit general class people. so, the central bank of the country in the form of authorised monetary official can play an effective role in bringing the unorganized money market towards organized money market. for this, by developing appropriate interest rate policy the money market can be made stronger, more effective and improved.
4. price stability
in underdeveloped countries if price remains unstable, then this can be made stable through monetary policy. that is, monetary policy is an important tool for the price stability. this helps in maintaining price stability with appropriate adjustment in demand for and supply of money. if agricultural and industrial production increase during the time of acceleration in economic growth as required by the economy through monetary policy, then demand for money will increase. but contrary to this, if economic growth is low or in a decrease state, then demand for money won't have any positive effect on the economy. in such a situation for price stability the monetary flow should be decreased. so, monetary policy has a great importance in bringing about price stability by controlling inflation and deflation.
5. increase in investment
in underdeveloped countries, the economy is in a backward state due to lack of increase in investment. due to very low income, the marginal propensity to consume of the people is very high. as a result there won't be any saving. investment is not possible without savings. monetary policy will a proper create environment for saving and it also encourages investment in productive sectors. this provides encouragement towards saving by increasing the interest rate and it also provides loan facilities at appropriated interest rate.
6. capital formation
in underdeveloped countries due to low income there won't be saving. due to lack of saving there won't be capital formation which is absolutely necessary for economic development. therefore, the country will be entangled in the "vicious circles of poverty" due to decrease in investment, income and employment. for the economic development of such countries the capital formation should be stressed. this will have multiplier effect in investment, income and saving. for this, monetary policy will help in capital formation by providing loan at low interest rate and increasing investment.
7.appropriate balance of payments
in underdeveloped and developing countries the balance of payment is always in an unbalanced state. the main reason for this is that the export is less than the import. such countries generally export raw materials and import goods made out of those raw materials. through monetary policy, production of export goods is encouraged by providing various subsidies and facilities to such industries production export goods and undertakes the policy of availing foreign exchange to import very essential goods. so, through monetary policy it is tries to create a suitable environment for balance of payment by controlling the foreign exchange rate.

objectives of monetary policy

objectives of monetary policy are not different from the objectives of economic policy. along with the change in time, the objectives of economic policies will be of different types according to various situations. the structure of the economy, the economic structure and the level of economic development can make the objectives of the monetary policy different. in such a situation, the central bank which is the representative of the body having monetary authority, while deciding the monetary policy and the preferences of the objectives, has to be careful and thoughtful. the determined preferences should be related to the economic state of the country. these should be changed from time to time. therefore, at the same time different countries will implement different monetary polices to fulfill different objectives. in general, the objectives of monetary policy in underdeveloped countries can be divided into the following five types:
1. exchange stability
the main objectives of monetary policy is to establish stable exchange rate. during the rate of "gold standard" the objectives of monetary policy was to establish stable exchange rate to maintain the balance of payment. instability in the exchange rate would become a big problem in the balance of payment. this would create instability in different sectors like, production, price, employment, etc. therefore, in the nineteenth and the twentieth centuries the objective of monetary of every country was to stabilise the exchange rate. instability in the exchange rate would badly affect the international trade because this would encourage speculation and hinder the economic development. therefore, if any country, involved in international trade, maintains stable exchange rate, then there will be a positive effect in international trade and balance of payment. so according to these various reasons the main objective of the monetary policy is to establish stable exchange rate.
after the "great economic depression" of the 1930 s, it highlighted that the stable exchange rate. should not be maintained. if price remains stable in all countries then stability in exchange rate won't have any negative effect. but in all countries of the world the prices of goods change unequally. in such a situation, if stability in the exchange rate is established, then difficulty will arise in internal price and the situation arises for keeping both the exchange rate as well as internal price stable. to be free from these problems, the change in the exchange rate between the domestic and foreign currencies can be brought about through the means of "devaluation" and "revaluation". since regular change in the exchange rate can create uncertainty, the objective of the monetary policy should be to maintain stability in the exchange rate.
2. price stability
the second important objective of the monetary policy is to maintain stable price. instability in price creates instability between employment, business, production, debtors and creditors. if price increases in the economy, then inflation occurs and if price decreases, then deflation accrues. in the state of inflation the people having fixed income i.e., wage, earners, salary earners, people investing on securities and creditors will have to face a big economic crisis. this will create difficulty in every sector of the economy. if the producers, businessman, debtors and shareholders will face economic crisis. this will even paralyse the economy. in addition to various economic difficulties, due to change in price of goods and services, unequal distribution of national income , unemployment as well as hindrance will occur in the economic development. so, to remain free from inflation and deflation as a result of change in price of goods and services the main objective of the monetary policy is to maintain stable price.
the monetary official has to control the quantity of money in use in a country and the quantity in order to check the comprehensive change in the internal price level. price stability, does not mean that the prices of all goods and services should always be maintained at the same level. if is to maintain reasonable stability in the general price level. if money flow increases along with the change in the level of employment and production that establish the price stability, then there won't be a large change in the price level. price stability can be maintained by increasing the flow of the money according to the requirement of the economy. for this, the commercial banks and unorganized money markets should follow appropriate policy as directed by the central bank which is in the from of authorized monetary official.
3. full employment
according to Keynes, the main objective of the monetary policy is to obtain full employment. full employment is necessary to maintain economic stabillity. through this, stability in the exchange rate can also be brought about. the state of full employment means availability of employment for all those people who are willing to work at prevailing or appropriate wage rate. that is, the state of full employment which means the demand for labour exceeds the supply of laborer. in other words, the state of full employment is that state in which demand for labour more than the supply of labour. in such a situation, the state of labour market will be favourable for the labour-buyers. but in such a situation there can be seasonal unemployment, voluntary unemployment and frictional unemployment. in the state of full employment, the mobilisation of all reasources available in the country will be optimum and the national income will also be maximum.
4. neutrality of money
neutral money creates disequilibrium when monetary change takes place in the economy. this is because when quantity of money increases in the economy, the demand for goods and services also increases. but quantity of goods and services won't increase immediately and as a result price level will increasing creating inflation. contrary to this, if quantity of money is decreased, then demand for goods and services can't be decreased immediately as the decrease in demand. as a result, the price of goods and services will decrease creating deflation in the economy. thus, both inflation and deflation will create disequilibrium between demand and supply in the economy. to control instability that occurs in the economy, the quantity of money has to be stabilised. according to the concept of neutral money, the quantity of money has to be controlled in such a way that there should not be any change in aggergate production, aggergate buying and selling, price level of goods and services, etc. so neutrality of money brings about the state of stability and equilibrium in the economy. if any changes occur, then that should only be due to technical changes. so, according to neutral monetary policy in any country when distributing economic resources in various activities of production there should not be any good or bad effects. the state of inflation and deflation will occur in the economy when the neutral money policy is not implemented. therefore, to remove this or to stop this from occurring neutral money policy has to be implemented.
5. economic growth
the objective of monetary policy should be to accelerate the economic growth of a country. economic growth is a long-run process. the objective of economic policy is to bring about continuous growth in production, income and employment. this will improve the living standard of the people of a country. for the fulfillment of this objectives, implementation of monetary policy is very necessary.
in developed countries, the main objective of the monetary ,policy is to maintain economic stability. but in underdeveloped and developing countries, the main objective of the monetary policy is the economic growth through acceleration in economic development. through economic development under the objective of economic growth is well developed in the developed countries, there exists a great problem in poor countries. economic growth occupies an important position in the policy of free economic and political organization. in free economy, the objective of the monetary policy is to increase demand along with the supply of goods and services with the economic growth.
in underdeveloped countries the long-run economic structure should be changed by controlling economic ebb and flow through monetary policy. this will accelerate economic development to some extent. for this the government has to work with "deficit budget" policy to increase insufficient investment. such "deficit budget" is fulfilled with internal and external loans and resources are mobilized to optimum scale. the objective of the monetary policy should be to expand industries with the increase in income and saving. this will involve all sectors of the economy actively and economic development will be accelerated.

fiscal policy

the policy formulated in related to the government revenues with the view of enhancing the economic development by increasing, employment and leading the whole economy forward are known as fiscal policies. since development of monetary and capital market of the developing and poor countries is negligible, the monetary policy undertaken by the central bank for the economic development cannot be successfully implemented. for this the government has to implement appropriate policy. with this as the central view and to improve the state of the economy, the government will formulate fiscal policy. so, the policty undertaken by the government for the managemant of government revenue, expenditure and lone to enhance economy stability and economic development in the economy is known as fiscal policy. the main objective of this is to establish economy stability in the economy by increasing output and employment as monetary policy undertaken by the central bank. the government undertakes verious fiscal policies in order to make economic policies successful. various revenues, public expenditures and lones come under the fiscal policy undertaken by the government. with proper adjustment of such fiscal factors. output, employment, income,etc. can be increase in the economy

nedded of money market

why is such a market needed? there are several reason. first for most individuals and institutes, inflow and outflows of cash are rarely in perfect Harmony with each other for example, governments collects taxes from the public only at certain time of the year,when personal and corporate income tax payments are due. disbursements of cash must be made through out the year, however, to cover the wages and salaries of government employees, office supplies,repairs and fuel costs, as well as unexpected expenses. when taxes are collected, governments usually are flush with funds that far exceeds their immediate cash needs. at these times, they frequently enter the money market as lenders and purchase treasury bills, bank deposits and other attractive financial assets.later, however, as cash run law relative to current expenditures, these same governmental units must once again enter the money market as borrowers of funds, issuing short -term notes attractive to money market investors.
there are several reasons to money market needed. they are as following.
1. it plays the vital role on the mobilizing the saving the money market accumulation the scattered the scattered resources and mobilizes them.
2. the government implement the policy of deficit budget to mobilize the international resources optimum. in such a situation, the government complements the deficit budget through the money market.
3. the development of the money market plays vital role for the successful implementation of the monetary policy.
4. the capital market has a vital role for the economic development of the developing countries . the capital market does not develop unit the money market develops.
5. although there is sufficient possibility of the investment in the developing countries . they have to be deprived of the opportunity of investment due to the lack of capital in the required quantity. when the money market is developed well in the capital found is formed and it provides the opportunity of investment.

Leakages of multiplier

The incomes of people are influenced by various factors limiting the process of multiplier. That is, due to leakages in income flow the effect of multiplier is reduced. If the marginal propensity to consume is 50% than 50% of increased income is taken as the leakages and only 50% is used in consumption expenditure. Due to the leakages the national income does not increase fully. So, leakages in various forms are the leakages of multiplier. Main leakages of multiplier are as follows:

1. Saving

Saving is one of the most important leakages of the multiplier because whole part of the increment in income is not used in consumption since marginal propensity to consume is less than unity in other words, some parts of the income is saved and this will remain separate from the income flow that will occur later on. Therefore, the higher, the marginal propensity to save in the economy, the smaller is the size of the multiplier. Similarly, the lower the marginal propensity to save, the larger is the size of the multiplier.

2. Debt cancellation

If part of the increased income is used to pay back the loan, then that part of the income won’t have any kind of effect on consumption and this will check the process of the multiplier. As a result, the size of the multiplier will be small.

3. Net imports

If part of the increased income is used on the consumption of foreign goods, then this won’t have any kind of effect on the consumption of the national production. That is, the expenditure on imported goods is the loss to the country. This will decrease the value of the multiplier.

4. Inflation

If due to increased investment the inflation increases then most part of the increased income will be used to pay for the increased price. This will affect the multiplier. That is, increase in the price of the consumption goods of the consumer’s means the expenditure on those goods will increase. Increase in the price of goods decreases the real consumption of the people. Thus, inflation is also one of the main leakages of multiplier.

5. Purchase of old stock and securities

If some part of the increased income is used in the purchase of old stock and securities in addition to consumption goods, then cumulative effect of income will be less than before. As people start purchasing old stock and securities, the consumption expenditure decreases and the size of the multiplier will be small.

importance or uses of multiplier

Concept of multiplier is important form the theoretical as well as practical point of view. For this reason, the importance of multiplier in business and economic sector. The importance of the multiplier can be explained as follows:
1. Importance in investment
Multiplier theory has taken investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. This clarifies that increase in income and employment is on the basis of increase in investment.
2. Analysis of trade cycle
It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.
3. Formulation of economic policy
The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country’s economic policy using the multiplier. This will help in creating the situation of full employment.
4. Public investment
Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.
5. Equality between saving and investment
The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.


Concept of multiplier is important form the theoretical as well as practical point of view. For this reason, the importance of multiplier in business and economic sector. The importance of the multiplier can be explained as follows:
1. Importance in investment
Multiplier theory has taken investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. This clarifies that increase in income and employment is on the basis of increase in investment.
2. Analysis of trade cycle
It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.
3. Formulation of economic policy
The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country’s economic policy using the multiplier. This will help in creating the situation of full employment.
4. Public investment
Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.
5. Equality between saving and investment
The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.