Public Policy is a set of interrelated decisions taken by a public authority, backed up by the common conscience of the citizens, for addressing a problem expressed through contemporary laws, regulations and consequent government actions and inactions.

Public Finance and Public Policy are very much related because when the decisions related to finance of a country or state are needed to be addressed by the government then it should be done through the help of public policy.

Public Policies related to public finance can be categorized into:-

1.Fiscal Policy

Fiscal Policy is concerned with the policy framework of the government after taking into consideration government spending, avenues of government earning, government borrowings, etc.

2.Monetary Policy

Policy of the central government regarding the quantity of money, exchange rate and interest rate is known as monetary policy. It is now more or less accepted that monetary policy plays an important role in controlling aggregate demand and ultimately inflation but with a time-lag.

Fiscal PolicyFiscal Policy refers to the policies in entirety which deals with the revenue-expenditure process of the government.

It has basically three components :-

(a)Revenue Policy It deals with the sources of revenue earned by government from both tax (income tax, sales tax, import duty, etc.) and non-tax sources (different kinds of fines, fees, etc.).
(b)Public Expenditure It deals with the various types of expenditures of the government required for its proper functioning.
(c)Public DebtWhen the public expenditure of a government exceeds its revenue, for continuation of its proper functioning, the government borrows from the public giving rise to public debt. Subject matters under this head are :-

(a) Total amount of public debt
(b)Redemption of public debt
(c)Impact of public debt on different policy matters.

Objectives of Fiscal Policy :-

i.Equity

Fiscal Policy tries to distribute income and wealth among the different members of the society in an equitable manner.

ii. Promotion of Economic Growth

Promotion of economic growth through fiscal policy can be done by the following ways :-

a)Provision of tax incentives to savings would stimulate rate of saving leading to moping up of the growth rate of the economy.
b)Issuance of public debt by government through bonds also helps to increase the savings rate and consequently economic growth.
c)Increase of public expenditure plays an important role in raising the effective demand of the economy. Effective demand, in turn, compels the producers to convert their savings to productive investment in pursuit of profit. This would help the economic rate to increase.
d)Economic growth could also be boosted up by increasing public expenditure.

iii. Efficient Resource Allocation

Efficiency in allocation of resources is one of the primary objectives of Fiscal Policy. In some special cases (like external economies, monopoly, dis-economies of production) market mechanism fails to achieve economic efficiency. For example, in case of public goods (jointly consumed, like bridge) economic efficiency are under achieved. These inefficiencies can be ironed out by the usage of taxes and subsidies.

iv. Stabilization

A capitalist economy runs according to the business cycle where a boom is followed by recession. During the boom period employment and output increases and the aggregate demand exceeds the aggregate supply. To check this inflationary gap, one of the following fiscal policy measures can be adopted :-

decreasing government transfer payments.
decreasing government expenditure.
rise in interest rates
rise in taxes
fall in subsidy

On the other hand, recession period observes excess supply in the economy. This deflationary gap can be contained by :-

increasing transfer of government
increasing government expenditure
a fall in taxes
a rise in subsidy
fall in interest rate

Monetary policy

Policy of the central government regarding the quantity of money, exchange rate and interest rate is known as monetary policy. It is now more or less accepted that monetary policy plays an important role in controlling aggregate demand and ultimately inflation but with a time-lag.

Salient features of monetary policy :-
 

(i)It is in response to the fiscal policy
(ii)It acts through credit channelization
(iii)Upward adjustment of credit cost helps in curbing inflation
(iv)Allocation of credit to non-governmental sector

Apex Bank's tools of monetary policy includes :-

(i)Quantitative Instrument

These include :-

(a)Open Market Operations --- Involves purchase and sale of government securities by the Apex Bank of a country. This is done to regulate the capacity of the commercial banks to credit creation.
(b)Minimum Reserve Requirement --- Apex Bank of a country directly influences the lending capacity of the commercial bank by changing the minimum reserve requirement from time to time.
(c)Bank/Discount Rate --- These are rate at which an Apex Bank lends reserve to the commercial banks. Change of bank rate thus works either as incentive or disincentive for the commercial banks to borrow from the Apex Bank. Hence, by the use of this Apex Bank directly influences the cost of money supply of the economy.

(ii)Qualitative InstrumentSelective use of instruments for credit control such as prevention of bank credit for speculative hoarding purposes. It helps to contain the unnecessary price rise of commodities.