Q.6 Explain how fiscal policy is used to achieve economic stability.

Ans: In order to achieve a stable economic condition, fiscal policy has to play a positiveand constructive role both in developed and developing nations. The specific roleto be played by fiscal policy can be discussed as follows: To act as optimum allocator of resources: As most of the resources arescarce in their supply, careful planning is needed in its allocation so as to achievethe set targets.Rational allocation would ensure fulfillment of various objectives. To act as a saver: 1. It should follow a rational consumption policy reduces the MPC and raises theMPS.2. Taxation policy has to be modified to raise the rates of old taxes, introduces newadditional taxes, and extends the tax-nets.3. Profit earning capacity of public sector units are to be raise substantially to mop-up financial resources.4. The government should

borrow more money both in the country and outside thecountry. 5. Higher the rate of interest are to be offered for government bonds and security. To act as an investor: Mere mobilization of financial resources is not an end initself. It should result in the creation of real resources which are more important inaccelerating the growth process. Rapid economic growth depends upon the volumeof investment.Hence, fiscal policies have to be ensuring higher volume of investment in bothprivate and public sectors. To act as price stabilizer: price stability is of paramount of importance in aneconomy.Extreme levels of both inflation and deflation would disrupt and disturbthe normal and regular working of an economic system. This would come in theway of stable and persistent growth. Hence all measures are to be taken to check these two dangerous situations so as to create necessary congenial atmosphere toprepare the background for rapid economic growth. To act as an economic stabilizer:

Price stability would create the necessarybackground for over all economics stability. Upswing and downswing in the levelof economic activities are to be avoided. If an economy is subject to frequentfluctuation in the form of trade cycle, certainly, it would undermine and disturb thegrowth process. Instability would come in the way of persistent and consistentgrowth in a country. Hence all measure to be taken to ensure economic stability. To act as an employment generator: Fiscal policy should help in mobilizingmore financial resources, convert them in to investment and create moreemployment opportunity to absorb the huge unemployed man power. To act as balancer: There must be proper balance between aggregate saving and aggregate investment, demand and supply, income and output and expenditure,economic overhead capital and social overhead capital etc. Any sort of imbalancewould result in either surpluses or scarcity in different sectors of the economyleading to fast growth in some sectors followed by lagging of some other sectors

To act as growth promoter: The basic objective of any economic policy is toensure higher economic growth rates. This is possible when there is higher nationalsavings, investment, production, employment and income. Hence, fiscal policy isto be designed in such a manner so as to promote higher growth in an economy. To act as in come redistribute: Fiscal policy has to minimize inequalities andensure distributive justice in an economy. This is possible when a rational taxationand public expenditure policy is adopted. More money is collected from richersection of the society through various imaginative taxation policies and a largeramount of money is to be spent in favor of poorer sections of the society. Thus,inequality is to be reduced to the minimum. To act as stimulator of living standards of people: the final objective is to raisethe level of living standards of the people. This is possible when there is higheroutput, income and employment leading to higher purchasing power in the handsof common man. Hence, fiscal policy should help in creating

more wealth in theeconomy. If there is economic prosperity, then it is possible to have a satisfactory,contended and peaceful life.Thus, fiscal policy has to play a major role in promoting economic growth in acountry