Fiscal policy is how the government manages its money, both what it spends and what it earns. You can see this in the government’s budget. When there’s too much demand for things, the government uses fiscal policy tools to fix its budget, especially to reduce budgetary deficit, which happens when it spends more money than it earns.
Fiscal Policy Instruments to Control Inflation:
- Revenue Policy: The government gets most of its money from taxes. When there’s too much demand, the government increases taxes, especially on wealthier people. This lowers the purchasing power of the rich, which means they spend less. This helps reduce overall demand, and the government earns more money through taxes.
Expenditure Policy: The government spends money on things like defense, civil services, social services, and development. When there’s excess demand, the government cuts down its spending. This reduces the demand for goods and services. By doing this, the government can decrease its budgetary deficit. It also takes steps to cut down on non-essential spending.
8.6.3 Other Measures
Apart from using monetary and fiscal measures, the government takes some other steps to control inflation. Here they are:
- Control of Prices: The government may set prices for essential goods. This helps prevent people from buying things in large quantities and trying to sell them later for more money.
- Wage Freeze: To control inflation, the government might stop wages from going up. This helps keep household incomes from rising too much.
- Dividend Freeze: The government might also stop companies from paying out dividends (profits to shareholders). This helps companies use that money to expand and make more things.
- Population Control Measures: The government can take steps to control the population, which helps reduce excess demand.
- Increase in Supply of Goods: To make sure there’s enough of everything, the government can:
- Improve farming with better seeds, fertilizers, and irrigation.
- Boost production of things people buy every day.
- Make sure businesses don’t hold too much stuff in stock.
- Make it easy to import important things like food and oils.
- Public Distribution of Essential Goods: The government can:
- Set up fair-priced shops.
- Keep a reserve of essential goods by setting fair prices for farmers and importing things.
- Limit how much traders can keep in stock.
- Make laws to control the prices of different things.
- Punish those who try to hide goods.
- Integration of Prices and Income: The government needs to make sure that as people’s incomes go up, the amount of stuff being made and the productivity also increase. This helps keep a balance and reduces inflationary pressures.
Implementing these policies honestly can help bring down inflation in the country.
Objective Type Questions
1.What is fiscal policy, as mentioned in the passage?
a) How the government manages its money, both spending and earning
b) The government’s approach to international trade
c) A measure of inflation
d) The government’s control over interest rates
Answer: a) How the government manages its money, both spending and earning
2.What does the government use fiscal policy tools for, especially when there’s too much demand for things?
a) Increase overall demand
b) Fix the budget and reduce budgetary deficit
c) Encourage borrowing
d) Lower taxes for wealthier people
Answer: b) Fix the budget and reduce budgetary deficit
3.Where does the government get most of its money from, according to the passage?
a) Loans from international banks
b) Printing more currency
c) Taxes
d) Foreign aid
Answer: c) Taxes
4.How does the government use Revenue Policy to control inflation during excess demand?
a) It decreases taxes on wealthier people
b) It increases taxes, especially on wealthier people, lowering their purchasing power
c) It encourages the rich to spend more
d) It cuts down on non-essential spending
Answer: b) It increases taxes, especially on wealthier people, lowering their purchasing power
5.What is the purpose of Expenditure Policy in controlling inflation, as mentioned in the passage?
a) Increase government spending to boost demand
b) Cut down on non-essential spending to reduce demand for goods and services
c) Encourage excessive demand for goods and services
d) Decrease taxes to stimulate spending
Answer: b) Cut down on non-essential spending to reduce demand for goods and services
6.What are “Other Measures” mentioned in the passage for controlling inflation?
a) Steps taken by individuals to manage their finances
b) Measures unrelated to inflation control
c) Steps taken by the government apart from monetary and fiscal measures
d) Measures taken by international organizations
Answer: c) Steps taken by the government apart from monetary and fiscal measures
7.How does the government control prices to prevent people from buying things in large quantities and trying to sell them later for more money?
a) Setting prices for essential goods
b) Increasing taxes on essential goods
c) Encouraging traders to hoard goods
d) Allowing free-market pricing
Answer: a) Setting prices for essential goods
8.What is the purpose of a Wage Freeze, as mentioned in the passage?
a) Encourage companies to increase wages
b) Control inflation by preventing wages from going up too much
c) Stimulate demand by increasing household incomes
d) Decrease productivity
Answer: b) Control inflation by preventing wages from going up too much
9.How does Dividend Freeze help control inflation?
a) It encourages companies to pay out more dividends
b) It stimulates demand for goods and services
c) It prevents companies from paying dividends, allowing them to expand and make more things
d) It increases household incomes
Answer: c) It prevents companies from paying dividends, allowing them to expand and make more things
10.What does Population Control Measures aim to achieve in relation to inflation?
a) Increase excess demand
b) Encourage population growth
c) Reduce excess demand by controlling the population
d) Have no impact on inflation
Answer: c) Reduce excess demand by controlling the population
11.How can the government increase the supply of goods, as mentioned in the passage?
a) Encourage businesses to hold more stock
b) Limit the import of important goods
c) Make it difficult for businesses to import essential things
d) Improve farming, boost production, and make it easy to import essential things
Answer: d) Improve farming, boost production, and make it easy to import essential things
12.What is the purpose of Public Distribution of Essential Goods, according to the passage?
a) Encourage traders to hoard essential goods
b) Set up fair-priced shops and limit stock held by traders
c) Allow traders to set their own prices for essential goods
d) Increase the prices of essential goods
Answer: b) Set up fair-priced shops and limit stock held by traders
13.What does Integration of Prices and Income aim to achieve, as mentioned in the passage?
a) Increase inflationary pressures
b) Keep a balance and reduce inflationary pressures
c) Encourage speculative activities
d) Stimulate demand for non-essential products
Answer: b) Keep a balance and reduce inflationary pressures
14.What does the passage suggest about the honest implementation of policies to control inflation?
a) It has no impact on inflation
b) It can help bring down inflation in the country
c) It increases inflationary pressures
d) It leads to increased government spending
Answer: b) It can help bring down inflation in the country
15.What is the primary focus of fiscal policy when there’s too much demand for things?
a) Increase overall demand
b) Reduce taxes for everyone
c) Fix the budget and reduce budgetary deficit
d) Increase non-essential spending
Answer: c) Fix the budget and reduce budgetary deficit