BBA 1st Year Business Environment FEMA Short Question Answer

Thus, cyclical unemployment in the underdeveloped countries can be traced back to external factors. In underdeveloped countries, disguised unemployment, refers to a situation where too many people are engaged in agriculture on account or over-population and unavailability of sufficient employment opportunities, people gravitate to land and generally more people than required are engaged in agriculture. In other words, if some people engaged in agriculture are withdrawn, this will not affect the agricultural production, which will remain as before. This is disguised unemployment. To overcome the problem of disguised unemployment also, a policy of increased capital formation and planned economic development, through which it can diversify and modernize the economy, is required. Hence, the fiscal policy in an underdeveloped country should aim at increasing the. rate of capital formation to deal with its unemployment problem in an effective manner.

In underdeveloped economies, fiscal policy alone cannot effect the results and side by side monetary policy should also be combined with fiscal policy in inflationary as well as depression condition. Only this combination and coordination between fiscal and monetary policy can give lasting results, as both are important instruments for securing economic stabilization in country. Thus, a judicious combination of two policy is necessary to obtain ever lasting results.

To achieve the conditions of full employment following measures have been suggested by J.M.
Keynes:

1. Deficit Budgeting; The government should follow a policy of deficit budget in order to fight depression and unemployment, wherein expenditure of the government exceeds its revenue.

2. Encouragement of Consumption and Investment; Taxation o1icy should encourage consumption and investment both. Indirect taxes should be reduced to encourage consumption and corporation tax and taxes on profits should be reduced to encourage investment.

3. Launching Public Work Programmes : The expenditure of the government should be planned and directed towards financing public work programmes and providing social security measures.

4. Public Debt Management: The policy should be directed for the achievement of full employment. In this context, the government should follow a cheap money policy and try to borrow from those people with whom the funds are lying idle.

5. Progressive Taxation; It is suggested that progressive taxation should be levied on saved income of the people rather than on income, which is to be spent.

Limitations of Fiscal Policies

The fiscal policy has following limitations:

(i) It is unable to adjust distribution of money flows.

(ii) Time lags in diagnosing recessions and inflation and devising appropriate fiscal measures brings operational limitations.

(iii) Structural adjustments are hard to dealt with through fiscal policy.

(iv) It i difficult to decide the magnitude of fiscal action and the optimum size of the budget.

(v) Efficiency of fiscal policy depends upon strict financial discipline on the part of government and its correct value judgment.

(vi) In democratic countries, fiscal policy changes in accordance with policy of political party coming to power, hence sometimes it suffers from instability

Q. 3. What do you mean by budget? How can union budget be used as an instrument of economic growth of the country?

Ans. Budget: Meaning and Definition

The term ‘Budget’ is derived from the french word “Bougette” which means a leather bag used to carry financial papers.

Thus, the word budget has come to mean papers containing financial matters.

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