Monetary Authority And The Natural Fiscal Authorities

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Fiscal policy refers the setting of the level of government spending and taxation by the government policy makers. It is the combination of taxes and public expenditure to help dampen the swing of the business cycle and contribute to the maintenance of a growing high-employment economy free from high or volatile inflation. In the other words fiscal policy refers a policy which is an important tool for managing the affairs between government income and expenditure.

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It is the basic management to manage macroeconomics stability and fostering economic growth. At present a number of reform programs are used for stream line public expenditure and revenue management. The government collects large share of revenue from taxation. Public revenue consists of two parts for collection of tax. These are direct tax and indirect tax. From these two types of taxes government earns 80% of total revenue for bearing all kinds of expenditure. Without these taxes government collects revenue other sources i.e. fee, charge, toll etc.

A tax is a compulsory contribution from the person to the government to defray the expense in the common interest of all without reference to special benefits – E.R.A. Seligman. An economic development of a country depends on the level of fan collection. Higher the collection of tax stronger the economy. Public expenditure is another important segment of the fiscal management of the government. Expenditure includes educational expenses, welfare, defense, subsidy etc.

The most significant function of government is the formulation and implementation of a sound fiscal policy. Fiscal policy influences saving investment and growth in the long run. In the short run the primary effect of fiscal policy is on the aggregate demand for goods and services. In the short run the primary effect of fiscal policy is on the aggregate demand for goods and services.

Literature Review

In order to analyze the game between the monetary authority and the natural fiscal authorities in monetary union the starting point is considering macroeconomic policy as conducted through two instruments, monetary and fiscal policy. It is generally accepted that the economic decisions made in one country can have significant spillover effect on other economics (Frankel and Rockett, 1986). This led to significant pressure for government to coordinate their economic policy.

The issues of policy coordination between one country and other countries that cooperate across them have had a central place in the literature on the design of macroeconomic policies in the EMU. This is no surprising given that EMU is to a certain extent an “experimental laboratory� representing a very interesting case study. Some of the literature review about fiscal policy has been given in the below:

“Fiscal policy we mean the se thing of taxes and public expenditures to help dampen the swings of the business cycle and contribute to the maintenance of a growing,

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