Q.(a) Explain the scope of Public Finance.

(a) Public finance studies public revenue, public expenditure, public debt, financial administration and economic stabilisation. (b) Equilibrium income/employment is fixed where the ADF cuts the ASF — the point of effective demand.

(a) Scope of Public Finance

Public finance is the study of the income and expenditure of the government. Its scope includes:

• Public revenue: the sources and principles of government income — tax revenue (direct and indirect taxes) and non-tax revenue (fees, fines, profits), and the canons of taxation.
• Public expenditure: the principles, causes of growth and classification of government spending, and its effects on the economy.
• Public debt: government borrowing — internal and external — its classification, burden and methods of redemption.
• Financial (budgetary) administration: preparation, enactment and execution of the budget, and audit and control of public funds.
• Economic stabilisation and growth: the use of fiscal tools to achieve full employment, price stability, growth and equitable distribution.
• Federal finance: the division of financial powers and resources between central and state (and local) governments.

(b) Equilibrium between ADF and ASF (Effective Demand)

• Concept: according to Keynes, the level of income and employment is determined at the point where the Aggregate Demand Function (ADF) equals the Aggregate Supply Function (ASF). This point is called effective demand.
• The two functions: ASF shows the proceeds entrepreneurs must expect to employ a given number of workers (it rises with employment). ADF shows the proceeds entrepreneurs actually expect to receive from the sale of output at each level of employment. …