MONETARY AND FISCAL POLICY

GROUP 8

KASHISH PGP10210

MANASWINI PGP10214

PREETI PGP10222

RAMANI PGP10224

PRASHANTH PGP10220

AKANKSHA PGP10188
Monetary Policy Fiscal Policy
• Initial impact on Goods market
• Initial impact on Asset market
• Influence the level of economic
• Regulate money supply in the economy
activity by changing government
using qualitative and quantitative tools
expenditure and taxes
• It is in the hands of Reserve Bank of
• Is in the hands of government of India
India
• The objectives are , Economic
• It has 2 objectives – to facilitate growth
Growth(with the help of taxes) along
and to control and regulate inflation
with Price stability
• Quantitative tools are , 1.policy rates,2.
• Other goals are – Capital formation,
reserve ratios and 3. open market
Allocation of resources, redistribution
operations
of Income for mitigating 2
inequality(tax rate based on income)
 SIMILARITIES

• Fiscal policy and monetary policy are similar in two aspects. First, they both represent

a nation's policies to regulate its economy. They both can be expansionary to increase
the aggregate demand during recession or restrictive to decrease the aggregate demand
when the economy is overheated
• Expansionary/contractionary monetary policy moves the LM curve to the right/left
• Expansionary/contractionary fiscal policy moves the IS curve to the right/left

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 EXPANSION

FISCAL MONETARY

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 LIQUIDITY TRAP

• Liquidity trap refers to a situation in which an increase in the money supply does not result in a fall in
the interest rate but merely in an addition to idle balances, the interest elasticity of demand for money
becomes infinite
• LM curve is horizontal i.E. Changes in the quantity of money do not shift it
• Fiscal policy is most effective

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 TRANSITION MECHANISM
The process by which changes in monetary policy affecting aggregate demand

Changes in Which leads to

Leads to Changes change in
Money Interest Investment
Demand/Supply Expenditure

Finally impacting
on the Aggregate
Demand Curve 6
 RECENT CORPORATE TAX CUT
IMPLICATIONS

• A major cut in corporate tax rates from 30% to 22% for existing domestic companies, and to
15% for new manufacturing companies from the earlier 25%.
• To bring cheer to all sectors of the economy, especially the distressed sectors such as
automotive, fmcg and real estate
• It would also raise investor confidence, boost investment and would lead to higher corporate
tax pro­fits and higher corporate savings
• The lower tax outflow would enable companies to retain a higher share of their pro­fits which,
in turn, could be used to reinvest in businesses or pay higher dividends to shareholders.

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 BANKS RELUCTANCE TO LEND

• If banks made prior bad loans that are not repaid then they may become reluctant to
make more loans despite demand. Banks may prefer instead to lend to the government
• Despite lower interest rates and increased demand for investment, banks may be
unwilling to make the loans necessary for the investment purchases
• The share of bank lending to real estate sector has fallen sharply to 17 per cent in 2016
from over 68 per cent in 2013 as banks are reluctant to provide credit to this industry
due to rising npas and lower profit in property business, according to the economic
survey.
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 CROWDING OUT
• A decline in private expenditures as a result of an increase in government purchases
• A high magnitude of the crowding out effect may even lead to lesser income in
the economy

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Pre-Gst Post-Gst