question archive 1)How did India's economy grow quickly overtime during 1975-2005? 2)In what kind of global economic situation (expansionary or contractionary) would fiscal policy and/or monetary policy be used?

1)How did India's economy grow quickly overtime during 1975-2005? 2)In what kind of global economic situation (expansionary or contractionary) would fiscal policy and/or monetary policy be used?

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1)How did India's economy grow quickly overtime during 1975-2005?

2)In what kind of global economic situation (expansionary or contractionary) would fiscal policy and/or monetary policy be used?

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1)

India's economy grows quickly overtime during 1975 -2005, There are many factors for this some of them are-

  • Large population - India is the second-largest population in the world. With a large population, this provides large human resources and a large consumption market. Due to this reason, India has become one of the most attractive destinations for investment which leads to high growth too.
  • Opening up the economy - In 1991 India suffered the financial crisis after that India opens up it's economy to the world such that the liberalization privatization and globalization policy came into existence. Economic liberalization is the government regulations in a country to allow private sector companies to operate business transactions with comparatively fewer restrictions.

2)

  • Fiscal Policy is a process used by the government to influences the aggregate demand in the economy. It has three main components, which are government spending, taxation, and transfer of payments.
  • Monetary Policy is a process used by the central bank to achieve sustainable economic growth and price stability through influencing the level of money supply in the economy. It has three main tools, which are the policy rate, reserve requirement ratio, and open market.

Expansionary Fiscal Policy in Slowing Economy:

The primary objective of the government on this policy is to stimulate the country's economic growth using its various fiscal policy tools. In this case, the government would cut tax rates, which increased their real household income resulting in strong consumer demand. Similarly, an increase in government spending drives economic growth that converted to domestic government projects, which creates jobs for its citizens. As a result, it would lower the unemployment rate then increased consumer spending that would boost economic growth.

Expansionary Monetary Policy in Slowing Economy:

Similar to the expansionary fiscal policy, the primary objective of the central bank is also to boost economic growth by controlling the level of money supply in the economy. The central bank uses its three monetary tools to stimulate the economy's growth, which are the policy rate, reserve requirement, and open market operations. The most commonly used tools are the discount rate. The central bank can stimulate the economy by cutting its policy rate, which would decrease the borrowing cost. As a result, it would be attractive to consumer to take out loans, which would increase the level of consumer spending. On the other hand, businesses would also be encouraged to take more debts then invest in high yielding assets such as stocks or business opportunities. Similarly, the reserve requirement ratio is also used to control the liquidity of the money supply in the market. A decrease in reserve requirement would lead to a decline of the required reserve by the commercial bank, which would result in an increase of available loans for the consumer.

Contractionary Fiscal and Monetary Policy in Overheating Economy:

The primary purpose of this type of policy is to control the level of inflation and the economy's robust growth. The government can increase its tax requirement, which reduces the spending power of the consumer. Similarly, the central bank can also increase the policy rate to discourage the consumer in borrowing and entice increased its savings due to an increase in the interest rates. Similarly, the decreased government spending also lowered the economic activity, which decreased the consumer demands and also the increased reserve requirement ratio that restricts the level of money supply in the economy. As a result, the level of consumer spending would drop, which leads to a decreased level of consumer prices and slow down economic growth.