1. Fiscal Policy
Receipts and expenditure policy of the govt is called fiscal policy Objectives of fiscal policy Full employment Higher economic growth Price stability Equal distribution of income and wealth Instruments of fiscal policy Taxation Public debt Deficit finance Public expenditure

2. Fiscal Policy Compensatory fiscal policy increase direct taxes
During the times of inflation (Contractionary fiscal policy)
increase direct taxes
indirect taxes not to increase
borrow money, not to repay debts
don’t adopt deficit finance
reduce public expenditure
increase expenditure to produce consumer goods
During the times of deflation (Expansionary fiscal policy)
reduce direct taxes
reduce indirect taxes
lend money, repay debts
adopt deficit finance
increase public expenditure

3. Fiscal Policy in Underdeveloped Nations
To solve the problems in general
Accelerate economic growth and employment creation
Mobilization of resources (agriculture income tax and other direct and indirect taxes)
Motivate savings
Capital formation
Diversion of resources from unproductive to productive
To bridge the gap in revenue deficit and capital deficit through borrowing
Managing external debt
Public expenditure oriented growth and welfare (gender budgeting)

4. Fiscal Policy in underdeveloped Nations
Deficit financing
Monetization of the economy
Balance between decrease inequalities and incentives to save, invest and produce
Price stability- free from demand pull and cost push inflation
Reduce Regional Disparities
Managing customs duties
Growth vs distribution , Stabilization vs growth

5. Monetary Policy
Monetary policy is the macroeconomic policy laid down by the central bank.
Money supply and credit policy of central bank is called Monetary policy .
Main Difference Between Fiscal and Monetary Policy. Monetary policy uses interest rates set by the Central Bank. Fiscal policy involves government spending and receipts to influence the level of aggregate demand.
Similarities between Fiscal and Monetary Policy.
(1) Aim at creating a more stable economy characterized by low inflation and positive economic growth.
(2) Meant for reducing economic fluctuations
Monetary policy can be expansionary and contractionary in nature.

6. Monetary Policy
The monetary policy in developed economies has to serve the function of stabilization.
In underdeveloped countries, the monetary policy has to be more dynamic so as to meet the requirements of an expanding economy by creating suitable conditions for economic progress.
According to Prof. Crowther, “Monetary Policy consists of the steps taken or efforts made to reduce to a minimum the disadvantages that flow from the existence and operation of the monetary system. It is a policy to regulate the flow of monetary resources in the economy to attain certain specific objectives.”
D.C. Aston has defined:”Monetary policy involves the influence on the level and composition of aggregate demand by the manipulation of interest rates and the availability of credit

7. Monetary Policy Objectives
Neutrality of Money:
Economists like Wicksteed, Hayek and Robertson are the chief exponents of neutral money. It means that quantity of money should be perfectly stable. Any monetary change is the root cause of all economic fluctuations.
Exchange rate Stability
Heavy fluctuations lead to loss of confidence on the part of domestic and foreign investors
Under Gold Standard ,when there was disequilibrium in the balance of payments of the country, it was automatically corrected by movements. It was popularly known, “Expand Currency and Credit when gold is coming in; contract currency and credit when gold is going out.” This system will correct the disequilibrium in the balance of payments and exchange stability will be maintained.

8. Monetary Policy
Full Employment: It implies not only employment of labourers but also employment of all economic resources. Employment should be productive and gainful
Price Stability: price stability does not mean ‘price rigidity’ or price stagnation
Economic Growth: utilization of all the productive natural, human and capital resources in such a manner as to ensure a sustained increase in national and per capita income over time
Balance of Payments: Equilibrium in BOP ,to faster and sustained economic growth.

9. Monetary Policy Instruments of monetary policy
Can be classified into quantitative and qualitative
Bank Rate
Cash reserve ratio
Statutory liquidity ration
Open market operations
Margin requirement
Credit Rationing
Moral suation
Direction action
The success of monetary policy is nil during depression when business confidence is at its lowest ebb; and it is successful during inflation

10. Role of Monetary Policy in Developing Nations
The socio-economic conditions of developed and developing nations are different
Monetary Policy in developed nations stability oriented , in developing nations it is growth oriented
Structure of interest rates, to minimizes the burden of public debt.
Integration of organized and Unorganized Money Markets
Reforming Rural Credit System
Improve the conditions of unorganized money and capital markets 
Develop banking infrastructure in unbanked areas and monetization of the non-monetized sector
Promote use of negotiable instruments instead of cash and increase banking habits
To ensure flow of funds into desirable channels

11. Demand for Money
Inconveniences in barter system caused invention of money
According to Crowther "Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value.“
Money act as medium of exchange, measure of value, store of value, Standard deferred payment
According to Classicals - demand for money arises due to medium of exchange , Keynes considered store of value also.

12. Demand for Money Demand for Money
(1)The price level (2) The interest rate(3) Real GDP(4) Financial innovation
Fisher Transactions approach to demand for money
Demand for money is due to the function of medium of exchange.
Value of goods , services and assets sold must be equal to the value of money paid to them
MV=PT
M=The quantity of money in circulation
V=Transactions velocity of circulation
P= Average Price
T= The total number of transactions

13. Demand for Money
The Cambridge cash –Balance theory of demand for money
It was advocated by Cambridge economists Fisher and Pigou
Demand for money is due to the function of store of value
The current interest rate, wealth, expectations of future price and future rate of interest also determine demand for money
Time lag between sale of commodities and purchase of commodities are reasons for keeping cash balances.

14. Demand for Money
Keynes theory of demand for money (Liquidity preference)
Transactions Demand for Money: Individuals and business firms keep amount of money either in cash or in demand deposits to bridge the time interval between income and expenditure. Lesser the time interval , lesser the money they keep and vice versa.
Transactionary demand for money depends upon the level of real income
Mt=f(Y)
t= Transactionary demand
Y=Income
Tobin and Baumol stated Transactionary demand for money depends on rate of interest also , i.e opportunity cost of holding money, if higher the interest rate higher the opportunity cost and vice versa .

15. Demand for Money Precautionary Demand for Money
Both individuals and businessmen keep cash balances to meet unexpected needs
The precautionary demand for money depends upon the level of income and psychological conditions and the society in which they are living.
Mp=f(Y)
p= precautionary demand
Y=Income
Total demand for money=M1+M2
M1=Transactionary motive & Precautionary motive
M2=Speculative motive

16. Demand for Money Speculative Demand for Money
Individuals business men demand money to get profits out of changes in rate of interest & bonds and securities prices
It depends on changes in rate on interest
Bond prices and the rate of interest are inversely related to each other
Ms=f (r)
s=Speculative demand
r= Rate of interest
If bond prices expected to rise , rate of interest expected to fall , businessmen buy bonds to sell when their prices actually rise.

17. Speculative Demand for Money