FISCAL POLICY

The regulation of Govt.’s income and expenditure with a view

of increasing production, employment and hence National
Income is called Fiscal Policy (FP).

Expansionary FP – To increase National Income and output

i.e. to raise aggregate demand. It releases too much funds in
the economy and can cause inflation.

Contractionary FP – To reduce National Income. Excessive

contraction may lead to inventory accumulation and hamper
production.

Tools of FP

(A) Taxation – The Govt. imposes direct and indirect taxes on

the people. By paying taxes, disposable income
falls. So, aggregate demand falls.
To increase National Income, taxes should be reduced.

To decrease National Income, taxes should be raised.

(B) Govt. expenditure – Every year the Govt. spends huge

sum under different purpose. This increases the aggregate
demand and encourages production.
To increase National Income, Govt. expenditure is increased.

To decrease National Income, Govt. expenditure is reduced

(C) Deficit Financing – In most developing countries, Govt.

income from taxes and other revenues fall short of their
expenditure. To finance their excess expenditure, the Govt.
resorts to deficit financing.
It is done by
 i) printing new currency notes
ii) short term borrowing from Central Bank

MONETARY POLICY

The regulation of money supply by the central bank of a

country with a view to increase AD, hence output and
employment is called monetary policy.

CENTRAL BANK

The apex institution in any country which controls the

circulation of money in any country is called central bank. In
India it is the Reserve Bank of India.

Functions of central bank

1) Printing new currency notes

2) An advisor and guardian to all other banks and financial

institutions in the country.

3) Financial advisor of the central Govt.

4) Lender of the last resort

5) Custodian of gold and foreign and foreign exchange

reserves.

6) Regulating the monetary policy

Tools of monetary policy

Quantitative tools

 Bank rate

 Cash reserve ratio (CRR)

 Statutory Liquidity Ratio (SLR)

  Open market Operations

 Repo instruments

Qualitative tools

 Differential bank rate

 Differential margin requirement

 Credit rationing

 Moral persuasion

COMMERCIAL BANKS

The most active and essential institutions in the financial

system of any country are the commercial banks. They act asa
medium of mobilising savings of the household sector and
making that available to the firm and Govt. Sectors.

Functions of commercial banks

1) Accepting deposits
Demand deposits – savings and current deposits
Time deposits – fixed,recurring deposit
& PPF

2) Extending loans –
Loan against property
Loan against security
Unsecured loans
Cash credit
Overdraft
3) agency functions
Accepting taxes and other bills
Issuing drafts
Discounting commercial bills
Disbursing pension and other Govt. Payments
Executing wills
Providing locker facility

4) maintains credit flow in the economy through credit

circulation.

SEBI (Securities and Exchange Board of India)

 The Securities and Exchange Board of India (SEBI) is the

leading regulator of the securities market in the
Republic of India, analogous to the Securities and
Exchange Commission in the U.S.
 SEBI drafts regulations and statutes in its legislative
capacity, passes rulings and orders in its judicial
capacity, and conducts investigations and enforcement
actions.
 Helping the business in stock exchanges and any other
securities market.
 Prohibiting fraudulent and unfair trade practices
relating to securities market
 Promoting investors education and training of
intermediaries of securities markets.