Economics 4 Marks Question

The Central bank acts as a banker to the central and state government. Central bank is a banker, agent and financial adviser to the government.
1. As a banker : Central bank performs the same function for the government as commercial banks perform for their customers. It maintains the accounts of the central as well as the state governments. It receives deposits from the government and makes short term advances to the government. It collects cheques and drafts deposited in the government accounts.
2. As a Fiscal agent: The central bank collects taxes and other payments on behalf of the government. It raises loans from the public and thus manage public debt.
3. As a Financial adviser: The central bank gives advice to the government on economic, monetary, financial and fiscal matters such as deficit financing, devaluation, trade policy and foreign exchange etc. According to De Kock, “The central bank operates as govt’s banker because of the intimate connection between public finance and monetary affairs”.

i. Consumption Function refers to functional relationship between consumption and national income.
ii. It is the point where consumption is equal to national income.
iii. It implies that there is autonomous consumption even when national income is zero.

It implies that the higher the marginal propensity to consume, the higher will be the multiplier. The minimum value of the investment multiplier can be 1 because the minimum value of MPC can be 0.

Fiscal policy is the revenue and expenditure policy of the government with a view to combat the situation of inflationary and deflationary gap in the economy.
(i) Fiscal measures to correct excess demand:
1. Reduction in government expenditure on public works, public walker and defense etc.
2. Reduction in public expenditure on transfer payments and subsidies.
3. Increase in taxes to lower the disposable income with the people.
4. Restricted deficit financing to check the flow of money in the economy.
5. Reduction in purchasing power through greater public borrowings.
(ii) Fiscal measures to correct deficient demand.
1. Increase in government expenditure and investment.
2. Increase in transfer payments and subsidies.
3. Reduction in taxes to increase the disposable income of the people.
4. More use of deficit financing to increase the flow of money.
5. Repayment of public debts.