undefined | unit 2 public sector economics

EEEC

Unit - 2

Public Sector Economy

Q1) What is Public Sector Economy?

A1) The general definition of the public sector is not just a function, but the ownership or control of government, which includes, for example, the exercise of public authority or the implementation of public policy.

Q2) What is Economic Welfare?

A2) Definition of economic welfare: The level of prosperity and quality of living standards in an economy. Economic can be measured through a variety of factors such as GDP and other indicators which reflect welfare of the population.

Economic welfare is a general concept which doesn’t lend to easy definition. Basically, it refers to how well people are doing. Economic welfare is usually measured in terms of Real Income, Real GDP. An increase in Real Output and real income suggest people are better off and therefore there is an increase in economic welfare.

However, economic welfare will be concerned with more than just levels of income. For example, people’s living standards are also influenced by factors such as levels of congestion and pollution. These quality-of-life factors are important in determining economic welfare.

Q3) What are Externalities?

A3) Externalities are benefits (costs) received (borne) by neither the seller nor the buyer but by third parties.

Private benefits + external benefits = social benefits.

Private costs + external = social costs.

Since external benefits and costs are not perceived by buyers and sellers they are not captured in markets.

Therefore, markets may fall to allocate resources inefficiently.

Q4) What are positive and negative Externalities?

A4) A positive Externality arises say when any project or activity (say building a bridge) creates a positive benefit for the immediate society. Thus, a positive externality would increase the utility of third parties at no cost to them. For example:

Govt Programmes: NREGA, Sarva Sikhshya Abhiyan, Bharat Nirman, Mid-day meals schemes, Millennium Development Goals by the United Nations (started in 2000)

Infrastructure Initiatives: Building a bridge or road. A positive externality would increase the utility of third parties at no cost to them.

Negative Externalities

Marginal social costs are greater than marginal private costs. Pollution is a cost that may not be borne by sellers, but it is a cost nonetheless to society. Private markets will overproduce (devotee too many resources) to the production of goods with negative externalities. Damage to environment and Scarce resources etc. Water pollution by industries that adds effluent, which harms plants, animals and humans. Noise pollution which may be mentally and psychologically disruptive.

Q5) What is labour market?

A5) The nominal market in which worker find paying work, employers find willing workers, and wage rates are determined.

Labour markets may be local or national (even international) in their scope and are made up of smaller, interacting labour markets for different qualifications, skills, and geographical locations. They depend on exchange of information between employers and job seekers about wage rates, conditions of employment, level of competition, and job location.

Q6) What are the causes of child labour?

A6) Causes of employing child labour

Wide spread poverty

Low level of income of the family

Underemployment of adult worker in the family.

They are available at much lower wages

Absence of improper functioning of the government machinery

Inability of the family to meet the basic needs to the children

Q7) What are the measures to reduce child labour?

A7) Measures to reduce child labour

Government should assume its responsibility of the custodian of the nation by enforcing strictly the legislation to control the child labour

Government should provide allowance to the family in order to bring up the children.

Government should extend facilities for education and health of the children.

Government should enable the adult workers of the family to earn a fair wage.

Children should be educated regarding the loss of their future benefits and opportunities.

Q8) Define Monetary System.

A8) The monetary system is defined as a set of policies, frameworks and institutions for the government to generate money in the economy. Such institutions include the Mint, the Central Bank, the Treasury, and other financial institutions. There are three common types of currency systems: commodity money, commodity-based money, and fiat money.

Q9) What are the types of Monetary system?

A9) The types of Monetary system are:

1. Commodity money

It is made up of precious metals or other commodities of intrinsic value. That is, the currency system physically uses the goods in terms of currency. This form of money retains its value as it melts. For example, gold and silver coins have been commonly used as a form of money throughout history.

2. Commodity-based money

This derives its value from the product, but you don't have to deal with it on a regular basis. The notebook has no specific value, but can be exchanged for a backed product. For example, the US dollar was used to bring its value to gold. This was known as the gold standard.

3. Fiat money

In this currency system, currencies that are legal tender according to government laws, that is, currencies whose value is guaranteed by the government.

Q10) What are the five main components of financial system?

A10) There are five main components:

1. Financial institution

Their role is to act as an intermediary between lenders and borrowers.

Lenders' savings are collected through various commercial markets.

These can turn risky financing into a safe investment.

Short-term debt can be turned into longer-term investments.

These allow you to compare comparable large deposits and loans with small deposits and loans because of their uniform face value.

These provide a balance between the recipient of the loan and the depositor of the amount.

There are two main types of financial institutions.

a. Banking or deposit handling institution

Their role is to make money from the masses.

Interest is paid on these deposits made by people.

The loaned money is offered as a loan to those who need it.

Interest will be charged on these loans given to those who need it.

Examples are banks and other co-operatives.

b. Non-banking or non-depositing institution

Their role is to sell commercial and financial goods and products to those who visit them.

These are based on the provision of insurance, investment trusts, brokerage transactions and more.

These examples primarily include businesses.

These have three additional categories:

Regulation: Management and institutions that regulate and overlook commercial and financial markets. Example – RBI, IRDA, SEBI, etc.

Intermediate: An institution that provides financial counselling and supports by providing loans and the like. Example – PNB, SBI, HDFC, BOB, Axis Bank.

Non-Intermediate: These institutions support the finances of corporate visitors. Example – NABARD, SIDBI, etc.

2. Financial assets

These objectives are to provide convenient trading of securities in the commercial and financial markets, based on the requirements of credit seekers.

These are goods or products sold in the financial markets. Financial assets include:

Call Money: Without guarantee, this is a one-day loan that will be repaid the next day.

Notice: Without guarantee, this is the rent for a loan of 1 to 14 days.

Term Money: When a certain amount of money deposited exceeds the maturity of 14 days.

Treasury Short Term Securities: These belong to the government in the form of bonds or debt securities as they have a maturity of less than one year. These are purchased in the form of government T-Bills, which are received as government loans.

Certificate of Deposit: This works in the form of electronic funds that remain in a particular bank for a period of time.

Commercial Paper: A product used by a company that is unsecured despite short-term debt.

3. Financial services

Their primary purpose is to provide counselling to visitors regarding the purchase or sale of real estate, transactions, transactions, loans, and investment permits.

They also ensure the effectiveness of the investment and the placement of funding sources.

These are usually picked up by asset and liability management companies.

Financial services are also included in them:

Banking Services: The functions that banks perform, such as providing loans, accepting debits, distributing credit or debit cards, opening accounts, and granting checks, are some of these services.

Insurance Services: These include services such as providing insurance, selling insurance, and brokerage transactions.

Investment Services: These services include oversight and management of investments, assets and deposits,

Forex Services: These include foreign currency exchange, foreign exchange, and foreign money transfers.

4. Financial market

These are the markets where bonds, stocks, money, investments and assets are traded and exchanged between buyers.

There are four main types of financial markets:

a. Capital market

These deal with transactions and transactions that take place in the market.

These are done for a year.

These are the three main types:

Corporate securities market

Government securities market

Long-term loan market

b. Financial market

These are for short-term investments.

They are built by governments, banks, and other institutions.

This market is based on low-risk wholesale debt with transparent products and formats.

It has two main types:

a) organized money market

b) Unorganized money market

c. Forex market

A highly developed market that handles several currencies.

It is responsible for the foreign remittance of funds.

This is based on the foreign currency rate.

d. Credit Market

This includes both short-term and long-term loans.

It is often given to both individuals and organizations.

These are granted by some banks, financial institutions, non-banks and more.

5. Money

This is an important exchange that can be used to purchase goods and services. It also can act as a store useful. It is evenly accepted everywhere.

It facilitates trading, especially instant daily purchases. It serves as a verifiable record in the socio-economic context.

Q11) What is a Central Bank?

A11) The Central Bank is the most important banking institution in the banking structure of every country. It is the ‘apex’ (highest) banking institution and is rightly treated as the ‘Lender of the money market’. It guides and regular the activities of all the banks in the country. The Central Bank acts as an agent, banker and adviser to the government in economic and financial matters. Their main objective is to regulate currency and credit system and to ensure economic stability and growth in the country. Today almost all the countries of the world have their own Central Banks.

Q12) What are the functions of Central bank?

A12) Functions of Central Bank: The functions are divided into two parts:

A) Monetary Function B) Non-Monetary Function

A) Monetary Function:

1) Monopoly of notes issue: The main function of the Central Bank is the issue of notes. Central Bank has been authorized to print and issue currency notes. No bank other than the Central Bank enjoys the right of note issue. As the Central Bank is the only authority of note issue, its notes enjoy a distinctive prestige. There is uniformity in the issue of notes and over-issue can avoid. Moreover, it creates confidence among people.

In India, the Reserve Bank of India acts as the Central Bank which enjoys the monopoly of note issue. It has been authorized to print and issue all currency notes except one-rupee notes and coins. The RBI adopts what is known as minimum reserve system to print notes. As per 1957 Reserve Bank of India (amendment) Act, the RBI keeps a minimum reserve of Rs. 200crores in gold and foreign securities. Out of this, Rs. 115 crores must be in gold and Rs. 85 crores in foreign securities. The notes issued in excess of Rs. 200 crores are backed by the government rupee securities.

2) Banker to the Government: It acts as the banker, advisor and agent of the government.

1) As a banker to the government: As a banker of the government, it carries out all banking requirements of the government. It accepts deposits and makes payments of all government workers. It transfers funds from one place to another or from one use to another use for the government. It collects taxes on behalf of the government and advances loans to the government. It manages public debts, interest on loans, repayments of loan from international organizations etc. Central Bank advises the governme1nt on monetary problems and implemented the monetary policy of the nation. In India the Reserve Bank of India performs all these functions. Since, its operation is spread all over India. The RBI has appointed the State Bank of India as its sole agent for transaction government business.

2) As an advisor to the Government: The central bank has complete knowledge about the functioning of the economy and can therefore advice the government on various economic and monetary matters. Its advices the government on various financial matters such as framing the budget, controlling inflation, foreign exchange policy, managing fiscal deficit, Monetary policy, etc.

3) Bankers Bank: The Central Bank is the apex body of the banking system. It supervises co-ordinates and controls the operations and activities of the commercial banks. It is the legal tradition that all commercial banks should keep a certain proportion of the demand and time deposits with the Central Bank of the country. This proportion is called cash reserve ratio (CRR).

The Reserve Bank of India also rediscount bill and provides financial assistance to commercial banks. The RBI grants loans to the scheduled banks for a period 90days against eligible bills. The RBI has been empowered to control the activities of all commercial banks under Reserve Bank of India Act 1934 and Banking Regulation Act, 1949.

4) Custodian of Nation’s Foreign Exchange / Determination of Exchange rate:

All foreign exchange reserve of the country is kept by the Central Bank of the country. It enables the Central Bank to exercise control over the foreign exchange. All foreign exchange transaction is done through the Central Bank. The Reserve Bank of India maintains the stability of the rate of exchange, section 40 of the RBI with this function.

It is obligatory for the RBI to buy and sell currencies of the members of the IMF. The Foreign Exchange Regulation Act (FERA) passed in 1947 to give wide powered to RBI to exercise control over foreign exchange. Over the years the act has been amended many times and currently, it is known as Foreign Exchange & Management Act (FEMA).

5) Lender of the last resort: The Central Bank helps the commercial banks when they face a financial crisis. When all the sources are closed, commercial banks can rely (depend) upon the Central Bank as the last resort (option) for securing financial assistance. That is why the Central Bank is called the Lender of the last resort. Sometimes cash reserve of the commercial banks gets exhausted. During such situations, Commercial banks can approach the Central Bank to come to their rescue. The Reserve Bank of India provides the necessary funds and relieves from their burden.

6) Clearing house facility: Central Bank provides clearing facility for the smooth functioning of commercial bank. It is a fact that there are large numbers of commercial banks opening in the economy. Each bank will have claims and counter claims over other. This is not possible for all commercial bank to meet personally to settle their claims. Central Bank solves this problem smoothly by debiting and crediting each bank concerned.

B) Non-Monetary Function:

1) Control & supervisory function: The Central Bank of India also takes the responsibility of supervising the activities for all commercial banks. It issues licenses to banking companies. It can take direct action against the erring commercial banks. It can suspend the activities of such commercial banks or may refuse to renew the license. In India the RBI controls, supervises the functions of all commercial banks.

The Reserve Bank of India Act, 1934 & Banking Regulation Act, 1949 have given RBI the power of supervision and control over commercial and co-operative bank.

2) Promotional & Development function:

a) To promote banking habits: The Central Bank has been playing a more responsible role towards the economic development of our country. Its functions are not confirmed to control of money market alone. In India, RBI exercises its power over commercial banks and puts them under pressure to open branches in the rural sector. This has contributed a lot towards rural banking and to cultivate banking habits among the poor people.

b) Agricultural finance: As a significant step towards rural credit, the RBI created various agencies and institutions for weaker sections under the various schemes for rural development. The arrival of NABARD in India has created a history in the field of rural finance.

c) Industrial finance: Central Bank takes several steps to meet the long-term requirements of the industrial finance. The financial institutions like IFCA, SFCA, ICICI, LIC, IDBI, IRCI, SIOBI, etc. play a vital role in boosting the growth in industrial sector in India.

d) Export-Import finance: RBI played a responsible role in the establishment of the Export-Import Bank (EXIM Bank) to provide finance towards export and import activities. The EXIM Bank was establishing in January, 1982 to provide refinance to the commercial banks and financial institutions against their export-import financing activities.

e) Encouraging small savings: To provide opportunities of investment and better returns for small savers, the RBI played an active role in the establishment of UNIT TRUST OF INDIA in 1963.

Q13) What is a Commercial Bank? State its functions.

A13) A commercial bank is an institution that operates for profit. It accepts deposits from the general public and extends loans to the households, the firms and the Government. The essential characteristics of commercial banking include

(1) Acceptance of deposits from the public.

(2) For the purpose of lending or investment.

(3) Withdrawal by means of an instrument whether a cheque, draft, order, etc

Functions:

Functions of commercial bank

(A) Primary Functions:

The primary functions of a bank are also known as banking functions.

They are the main functions of a bank. They are as follows –

(I) Accepting Deposits: Accepting Deposits from the public is the most important function of a modern commercial bank offering various types of deposit accounts; banks mobilize the savings of the community. People who have surplus money deposit it with a bank for safety. The commercial banks protect the deposits and give interest on such deposits. There are four types of accounts:

(a) Saving Deposits Accounts: It is a deposit account which is operated by individuals for the purpose of saving a part of their income. Its main objective is to promote savings. It encourages saving habits among the salary earners and others. There is no restriction on the number and amount of deposits. But withdrawals are subject to certain restrictions. Banks pay a certain percentage of interest on this deposit. At present it is 4 % p.a. The money can be withdrawn either by cheque or withdrawal slip.

(b) Fixed Deposits Accounts: Fixed deposits are kept in a bank for fixed period varying from 30 days to several years. A certain sum of money is deposited for a fixed period. A higher rate of interest is paid. The rate may vary from bank-to-bank Withdrawals are not allowed before the maturity of period. In case of emergency, if the depositor wants to withdraw money before the maturity date, he will have to lose some interest. The depositor is given a fixed deposit receipt which he has to produce at the time of maturity. The deposit can be renewed for further period. Fixed deposit account is also known as time deposit.

(c) Current Deposits Accounts: These accounts are also known as demand deposits because the amount can be withdrawn on demand. This type of account is opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals. There, is no restriction on the number and amount of deposits. There are also no restrictions on the withdrawals. Bank does not pay any rate of interest on such accounts. The bank provides overdraft facility to current account holder. Banks’s charge incidental commissions on such accounts. It facilitates the industrial progress.

(d) Recurring Deposits Account: Under this account, regular income earners deposit a certain amount of money at regular intervals for a certain period of time. For example, an individual can deposit, say Rs 500 every month for a certain period say, 2 years. Its main objective is to develop regular savings habits among the public. The period of deposit is minimum 6 months and maximum 10 years. The rate of interest is higher. At the end of the maturity period, the account holder can get substantial amount, which can be utilized for the purchase of consumer durables or some other investment such as land, machinery, etc.

(II) Granting Advances (Loans):

The second important function of a commercial bank is to extend loans and advances. The money which is received by banks by way of deposits is utilized for granting loans and advances to worthy borrowers. The profit earning capacity of a bank mainly depends upon the performance of the function. This function is also important in the context of economic development in general and development of trade, industry and commerce.

(a) Overdraft Facility: An overdraft facility is granted by the bank only to those persons who have their current accounts in the bank. To meet the temporary needs of the customer, the bank may permit the customer to overdraw the amount from the bank in excess of his balance. The bank may grant such advance on the personal security. The interest is charged only on the actual amount used. The overdraft is granted only occasionally and for short periods. A certain amount is sanctioned as overdrafts which can be withdrawn within a certain period of time say three months or so. It is sanctioned to traders, partnership firms and joint stock companies. The overdraft facility can be renewed from time to time.

(b) Cash Credit: It is a short-term credit given by the bank to any businessman to meet regular working capital needs. The bank opens a separate account in respect of cash credit. The borrower is allowed to draw from that account up to a certain ‘limit against a bond signed by securities or any other eligible securities. Interest is charged only on the actual amount withdrawn by the customer. It can be availed by current account holders as well as other businessmen. Most industrial concerns and business houses borrow money in this form.

(c) Loans: When a banker makes a lump-sum advance to the customers, it is called 'loan'. Interest is charged on the entire amount sanctioned irrespective of whether the complete amount is used or not by the customer. Loans are of various types i.e., Term loans, participation loans, personal loans, call loans, collateral loans etc.

a) Call Loans or Money at call: are loans repayable at short notice. They are called call loans, as they can be called back at any time. These loans are given to for a period of 7 to 15 days for investment in stock market. The rate of interest is the lowest.

b) Short term Loans: are provided by commercial bank for a period not more than two years. The rate of interest is higher. They are given to businessmen to satisfy their working capital requirement.

c) Medium term Loans: The loans are sanctioned for a period of two to five years period. The rate of interest charged for this type of loan is more than the short-term loans. Such loans are useful to industries to introduce innovations or for introduction of new method of production.

d) Long term Loans: Loans which are sanctioned for five years are known as long term loans. The rate of interest charged is higher than other loans. Such loans help businessmen to introduce permanent changes in the methods of production.

Discounting Bills of exchange: Another important function that the modern banks perform is the discounting of bills of exchange. Advances are made by discounting the bills of exchange. These advances are given for short periods only. When the holder of the bill is not in a position to wait till the maturity of the bill and requires the cash urgently, he sells the bill of exchange to the bank. The bank purchases the instrument at a discount. This type of business is very common in advanced countries.

(B) Secondary Functions:

Secondary functions are also known as non-banking functions or subsidiary

functions or subsidiary functions. They are classified into two main categories

(a) Agency functions (b) General utility Functions

(A) Agency Functions: Bank also act as agents for their customers and in that capacity perform certain functions, which are known as agency functions. For these services, the bank charges certain commission from the customers. Some of the agency functions are as follows:

1) Collection: The commercial banks collect cheque, bills, draft interest, dividends on behalf of their customers and credit them into their accounts. This service is provided on the standing instructions from customers.

2) Payments: Banks also pay bills, insurance premium interest, loan installments, electricity bills, telephone bills, etc. on behalf of their customers as per their direction.

3) Purchase and Sale of Securities: Bank’s purchase or sell shares, bonds and securities of private companies on behalf of their clients.

4) Acts as Trustee: Banks acts as the trustee and the executor of the wills of their customers after their death.

5) E-Banking (Electronic Banking): A customer can operate his bank account through internet. Money can be transferred from one place to another for their customers. E-banking helps businessmen, traders, merchants in transacting business.

6) Dematerialization Account (De-mat Account): Some banks provide De-mat facility. De-mat account is useful to investors who deal in shares. The transactions related to buying and selling of shares are recorded in a separate De-mat account. Periodically statements regarding shares transactions are given to each investor.

B) General Utility Functions:

1) Safe Deposit Vault (Lockers): This facility is available to the general public to enable them to keep their valuables and securities like ornaments, jewels, documents, deeds, etc. There is a separate section in banks where lockers are provided in various sizes on payment of fixed rates.

2) Remittance of Funds: Banks remit money from one place to another or even from one country to another. Remittance of fund is done by telegraphic transfer, mail transfer, demand draft, etc.

3) Letter of credit: Commercial banks also issue letters of credit, to enable the traders to buy goods from foreign countries on credit. Through this letter of credit, the bank in one country authorizes another bank in foreign country to honour the draft or cheque of the person named in the document. The payment is limited to the amount shown in the letter and the amount is chargeable to the bank which issues the letter.

4) Referee: As a referee a bank authenticates the credit worthiness of its customers. This enables the customers to run their business smoothly and also obtain goods and services on credit.

5) Underwriter: Banks provide underwriting facility to the joint stock companies especially new business enterprises and also to the government in order to help them in raising funds. It guarantees the purchase of certain portion of shares if not sold in the market. Later they are free to sell these shares in the market whenever they want to do so. This is all done by the banks on a small commission from the company.

6) Dealings in Foreign Exchange: By keeping separate foreign exchange department, commercial banks offer services for converting one currency into another.

7) ATM facility (Automated Teller machine): Now-a-day banks also provide ATM facility to their customers. As a result, they can withdraw money at any time of the day, at their convenience, whenever they need it.

8) Collects statistics: The modern banks also collect statistics about money, banking, trade, commerce and publish them in form of pamphlets and handouts. This helps their customers in acquiring knowledge about the latest economic situation.

9) Travellers’ Cheques: Banks help customers by issuing internal or international travellers’ cheques. When people travel within the country or between countries traveller’s cheques are used as most convenient method of carrying funds.

Q14) What is Capital market?

A14) Capital Markets are intended for long-term or backed trading. These markets lead a wealth of savers to those who can use them productively in the long run, such as when businesses and governments make long-term investments. A capital market is defined as a market that is funded over a period of one year or more. It is part of the financial system involved in raising funds by dealing with equities, fixed income and other long-term investments.

Q15) What is the Debt market?

A15) This is a market for trading (that is, buying and selling) fixed income products. Bonds can be securities issued by central and state governments, local governments, and governments. Depends on an institution or a private organization such as a financial institution, bank or company. What are Bonds / Debts? Simply put, a bond / debt can be defined as a loan for which the investor is the lender. The bond issuer pays the investor's interest (at a given rate and schedule) in return for raising funds. The maturity date is the date on which the issuer must repay the principal to the investor. The bond market (bond market or credit market) is where participants can buy and sell new issuances, or debts, called markets. This is usually in the form of notes, invoices, and so on. The bond market is the market where debt products are traded. Debt products are assets that require a fixed payment to the holder, usually with interest. Examples of debt products include fixed income (government or corporate) and mortgages.

Q16) What is Fiscal Policy?

A16) Fiscal policy is associated with increased government revenues and the generation of government spending. To generate income and bear spending, governments formulate policies called budgetary or fiscal policies. Therefore, fiscal policy is related to government spending and government revenue. Fiscal policy determines the size and pattern of government-to-economy and economy-to-government spending flows.

Q17) What are the main objectives of Fiscal Policy?

A17) 1. Effectively mobilize resources to ensure development:

An important purpose of fiscal policy is to ensure rapid economic growth and development. This goal of economic growth and development can be achieved by mobilizing resources in the right way. India's central and state governments have used fiscal policy to mobilize resources. Financial resources can be mobilized by: -

2. Taxation:

Through effective fiscal policy, the government aims to mobilize resources with both direct and indirect taxes.

3. Public savings:

Resources can be mobilized through public savings by reducing government spending and increasing the surplus of businesses in the public sector.

4. Personal savings:

Through effective financial measures, such as tax incentives, governments can source resources from the private sector and households. Financial resources can be mobilized through government bonds, government loans by issuing government bonds, loans from domestic and foreign stakeholders, and deficit finance.

5. Efficient allocation of limited financial resources:

Central and state governments have attempted to efficiently allocate available resources. These resources will be allocated to development activities, including spending on railroads and infrastructure. Non-development activities, on the other hand, include spending on defence, interest payments, subsidies and more. Socially desirable service. Therefore, India's fiscal policy is designed in a way that encourages the production of desirable commodities and discourages socially undesirable commodities.

6. Reducing income and wealth inequality:

Fiscal policy aims to achieve equity or social justice by reducing income inequality between different sectors of society. Direct taxes, such as income tax, are levied more on the wealthy than on the low-income. Indirect taxes are also high for semi-luxury and luxury items that are mainly consumed by the upper middle class and upper class. The government is investing a significant portion of its tax revenues in implementing poverty alleviation programs to improve the condition of the poor in society.

7. Price stability and inflation control:

One of the main goals of fiscal policy is to curb inflation and stabilize prices. This requires monetary action, and the government is constantly aiming to curb inflation by reducing budget deficits, introducing tax-saving schemes, and productive use of financial resources.

8. Job creation:

Responsible governments make every possible effort to increase employment in the country through effective fiscal measures. Investing in infrastructure has resulted in direct and indirect employment. Lowering taxes and tariffs on small industry (SSI) units encourages more investment and, as a result, creates more jobs. The Government of India is implementing various rural employment programs to solve problems in rural areas. Similarly, the self-employed system is adopted to provide employment to technically qualified people in urban areas.

9. Balanced regional development:

Another main purpose of fiscal policy is to bring about balanced regional development. From the government, there are various incentives to launch projects in the underdeveloped areas, such as cash subsidies, tax concessions, obligations in the form of tax exemptions, and loans at concession rates.

10. Reduce the balance of payments deficit:

Fiscal policy seeks to encourage exports through financial measures such as income tax exemption on export income, central customs exemption, sales tax and octroi exemption. Forex is also protected by providing financial benefits to import substitutions, such as imposing tariffs on industries and imported goods.

Foreign exchange obtained from exports and saved by import substitution helps solve the balance of payments problem. In this way, balance of payments disadvantages can be corrected by imposing tariffs on imports or subsidizing exports.

Q18) What is monetary policy?

A18) Monetary policy concerns the steps taken to regulate the money supply, costs, and credit availability in the economy. It also deals with the distribution of credit between users and between users, and deals with both bank lending and borrowing rates. In developed countries, monetary policy has been effectively used as an anti-circular policy to overcome depression and inflation.

Q19) Explain Phillips curve.

A19) The Phillips curve shows that inflation and unemployment are inversely related. Higher inflation leads to lower unemployment and vice versa. 3

The Phillips curve, a concept used to guide macroeconomic policy in the 20th century, was questioned by stagflation in the 1970s2.

Understanding the Phillips curve in the light of consumer and worker expectations shows that the relationship between inflation and unemployment may not hold in the long or short term. 2

Understand the Phillips curve

The concept behind the Phillips curve shows that changes in unemployment within the economy have a predictable impact on inflation. The inverse relationship between unemployment and inflation is represented by a downward concave curve that shows inflation on the Y-axis and unemployment on the X-axis. When inflation goes up, unemployment goes down, and vice versa. Alternatively, focusing on reducing unemployment will increase inflation and vice versa.

The belief in the 1960s was that fiscal stimulus would increase aggregate demand and begin to have the following effects: Labor demand will increase, then the pool of unemployed will decrease, and companies will raise wages to compete and attract smaller talent pools. Wage costs of businesses rise, and businesses pass those costs on to consumers in the form of rising prices.

Q20) What are the means used to implement monetary policy?

A20) There are several direct and indirect means used to implement monetary policy.

Cash Reserve Ratio (CRR): The share of net demand and time debt (deposits) that a bank must maintain as a cash balance with a reserve bank.

Legal Liquidity Ratio (SLR): The ratio of net demand and time liabilities (deposits) that banks must maintain on safe and liquid assets such as government bonds, cash and gold. SLR changes often affect the availability of banking system resources for lending to the private sector.

Refinancing Facility: Sector-specific refinancing facilities aim to realize sector-specific objectives by providing liquidity at a policy repo rate-linked cost. However, reserve banks have gradually subsided focused on sector-specific policies because they interfere with the mechanism.

Liquidity Adjustment Facility (LAF): Consists of overnight and term repo / reverse repo auctions. Gradually, Reserve Banks have increased the share of liquidity injected into the LAF through the Term Repo.

Term Repo: Since October 2013, the Federal Reserve Bank has introduced Term Repo (various periods, like 7/14/28) to inject liquidity over an extended period than overnight. the aim of the term repo is to support the event of the interbank market. this enables you to line market-based benchmarks for loan and deposit pricing, through which you'll improve monetary policy communication.

Marginal Permanent Facility (MSF): A facility that permits a planned full-service bank to borrow additional overnight money from a Federal Reserve Bank by dipping it into the SLR portfolio (currently 2 of net demand and time debt deposits). %) Penalty rate of interest (currently 100 basis points above the repo rate). This provides a security valve against unexpected liquidity shocks to the banking industry. MSF rates and reverse repo rates determine the corridor of day-to-day movements in market interest rates.

Open Market Operations (OMO): These include both full purchase / sale of state securities (for liquidity injection / absorption).

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