Fiscal Policy

By Hamza
 What is Fiscal Policy?
Primarily an economic policy initiated by the
government by means of changing taxes or spending
to achieve economic targets.

It is a powerful tool in developing economies and in

economies where the financial system is weak and
therefore monetary policy may be less effective.
 Types of Fiscal Policy
• Expansionary
• Contractionary

• FISCAL DEFICIT = TOTAL REVENUE – TOTAL

EXPENDITURE
 Components of Fiscal policy
Automatic Stabilizers
Countercyclical aspects that automatically offset the
economic headwinds. Like?

Discretionary countercyclical components

Reactionary measures in the face of economic
challenges
How much does government spending boost
GDP?
• Y = C + I + G + (X-M) see what Government
spending would do to GDP?
• It is called Government expenditure Multiplier
• Would it be a higher or lower than 1?
• What is crowding out Behavior?
– Crowding out occurs when rising government
expenditure partially or even fully displaces
expenditures by households and firms.
 HOW DOES GOVERNMENT FINANCE ITS
FISCAL DEFICIT?
Government can finance its fiscal deficit by the
following means:
1- Domestic Borrowing
a- Banks and State Bank (Central Bank) This is
highly inflationary
b- Non-Banks (National Savings, postal service)
c- Privatization proceeds
2- External Borrowing
- Such as ADB, World Bank, IDB etc