GROUP- H
Participants- Siva Rama Krishna, Sai Pranitha,
Syed Arshil, Shruthi, Venkateswar, Mitesh and
Akash.
ABSTRACT
This presentation explores the dynamic
relationship between fiscal policy and foreign
exchange rates within the context of
macroeconomics. We delve into how government
spending and taxation decisions impact exchange
rates, affecting trade balances, inflation, and
economic stability. Understanding this intricate
interplay is crucial for comprehending the
broader implications on a nation's economy.
INTRODUCTION
In the realm of macroeconomics, the interplay between fiscal policy and foreign exchange rates
holds a critical role in shaping a nation's economic landscape. Fiscal policy, encompassing
government spending and taxation, not only influences domestic economic conditions but also
has a substantial impact on a country's exchange rates. Understanding how these policies are
interconnected is essential, as fiscal decisions can trigger fluctuations in currency values,
impacting trade balances, inflation rates, and overall economic stability. In this presentation,
we'll delve into the intricate relationship between fiscal policy and foreign exchange rates and
explore their implications on a macroeconomic scale.
FISCAL POLICY
The Fiscal Policy deals with the taxation
and expenditure decisions of the
government. It is one of the primary tools
that governments employ to manage
economic growth, control inflation, reduce
unemployment, and achieve various other
macroeconomic objectives.
Types of Fiscal 2. 3.
Policy- 1. Expansionary Contractionary
Neutral Fiscal Policy Fiscal Policy
Evolution of
Indian fiscal
policy
The Indian Constitution provides the overarching
framework for the country's fiscal policy and also
provides that for every financial year, the
government shall place before the legislature a
statement of its proposed taxing and spending
provisions for legislative debate and approval. This
is referred to as the Budget.
The central and the state governments each have
their own budgets. The resulting economic
framework imposed administrative controls on
various industries and a system of licensing and
quotas for private industries. Consequently, the
main role of fiscal policy was to transfer private
savings to cater to the growing consumption and
investment needs of the public sector.
Other goals included the reduction of income and
wealth inequalities through taxes and transfers,
encouraging balanced regional development,
fostering small scale industries and sometimes
influencing the trends in economic activities
towards desired goals.
OBJECTIVES OF
FISCAL POLICY
Boosting employment levels and economic
development.
Maintain economic growth rate.
Raising the standard of living.
Maintaining equality in price levels and
balance of payments.
Full employment
Price stability
Optimum allocation of resources
Equitable distribution of income and wealth
Economic stability
Capital formation and growth
Accelerating the rate of economic
development
Encouraging investment
•TOOLS OF FISCAL
POLICY
IMPORTANCE OF
FISCAL POLICY
• In the presence of sticky prices or wages, fiscal policy affects
macroeconomic performance via a second channel, the exchange
rate channel. For instance, an increase in government spending
that generates nominal appreciation hurts the profitability of firms
in the traded sector if they face exogenous foreign currency prices
and domestic nominal wages are not fully flexible. We investigate
this issue formally by conditioning responses to fiscal policy shifts
on the exchange rate regime in place in each country in each time
period.
• In a country like India, fiscal policy plays a key role in elevating the
rate of capital formation both in the public and private sectors.
• Through taxation, the fiscal policy helps mobilize considerable
amount of resources for financing its numerous projects.
• Fiscal policy also helps in providing stimulus to elevate the
savings rate.
• The Fiscal policy gives adequate incentives to the private sectors
to expand its activities.
• Fiscal policy aims to minimize the imbalance in the dispersal of
income and wealth.
FOREIGN EXCHANGE RATE
When trade takes place between the residents of two countries, the two countries
being a sovereign (not controlled by any other country) state have their own set of regulations and
currency. Due to the different currency the problem arises in the conduct of international trade
and settlement of the transactions. While the exporter would like to get the payment in the
currency of his country, the importer can pay only in the currency of the importers country. This
creates a need for the conversion of the currency of importer‘s into that of the exporter‘s country.
Foreign exchange is the mechanism by which the currency of one country is converted into the
currency of another country. The conversion is done by the banks who deal in foreign exchange.
DEFINITION:FOREIG
N EXCHANGE RATE
The foreign exchange rate is the price of one currency in
terms of another currency. It is determined by the supply
and demand of currencies in the foreign exchange
market. The supply and demand of currencies are
influenced by factors such as interest rates, inflation,
trade balance, and economic health of a country. A
higher- valued currency means that a country can buy
more foreign goods and services, but it also makes its
exports less competitive in foreign markets.
DETERMINATION OF
EQUILIBRIUM
EXCHANGE RATE
The equilibrium exchange rate is determined at a
point where demand for and supply of foreign
exchange are equal. It is also called ‘free exchange
rate’ as it is determined by the free play of supply and
demand forces in the international money market.
The equilibrium is established at a point where the
quantity demanded is equal to the quantity supplied
of foreign exchange. It is the normal rate in the sense
that it is determined by the long-term equilibrium in
the balance of payment.
The equilibrium exchange
rate (E) occurs at a point
which the quantity
demanded of a foreign
currency equals the
quantity of that currency
supplied. In the figure, the
determination of foreign
exchange rate has been
illustrated.
CONCLUSION
the dynamic interplay between fiscal policy and foreign exchange rates
underscores the importance of a holistic and well-coordinated economic
strategy. Policymakers need to carefully consider the potential impact of
fiscal decisions on exchange rates, striving for a balance that promotes
economic growth and stability both domestically and in the global
context.
References
• Text books
• "Macroeconomics" by N. Gregory Mankiw
• "Macroeconomics" by Paul A. Samuelson and William D. Nordhaus
• "Macroeconomics: Principles and Policy" by William J. Baumol and
Alan S. Blinder
• "Macroeconomics" by Olivier Blanchard
• Indian economy by Ramesh Singh
Referred links
https://www.hellovaia.com/explanations/macroeconomics/internatio
nal-economics/the-equilibrium-exchange-rate/
https://www.sciencedirect.com/science/article/pii/S00472727010019
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