Question

Role of fiscal and monetary policy in developing countries

Answer 1

The various tools of fiscal policy such as budget, taxation, public expenditure, public works and public debt can go a long way for maintaining full employment without inflationary and deflationary forces in underdeveloped economies.

Obviously, taxation and public expenditure is a powerful instrument in the hands of public authority which greatly affect the changes in disposal income, consumption and investment.
An anti-depression tax policy increases disposable income of the individual, promotes consumption and investment. This will ultimately result in increase in spending activities which in turn, increase effective demand of the people. On the contrary, during inflation, anti-inflationary policy measures help to plug the gap.