This graph illustrates the goal of stabilization policies. The red line is the "natural" business cycle. Rising and falling around the blue long-run trend
line. But it rises and falls too much, causing inflation and
unemployment. Policy makers would rather have a business cycle more like
that revealed with a click of the [Stabilization Policies] button.Stabilization
policies can achieve this result by countering business cycle ups and
downs. When unemployment rises with a business-cycle contraction,
expansionary policies are appropriate. When inflation worsens with a
business-cycle expansion, contractionary policies are appropriate. Once
again, note that stabilization policies are a countercyclical.
Contractionary policies counter an expansion and expansionary policies
counter a contraction.
Economic policies undertaken by governments to counteract business-cycle fluctuations and prevent high rates of unemployment and inflation. The two most common stabilization policies are fiscal and monetary. Stabilization policies are also termed countercyclical policies, meaning that they attempt to "counter" the natural ups and downs of business "cycles." Expansionary policies are appropriate to reduce unemployment during a contraction and contractionary policies are aimed at reducing inflation during an expansion.
Monetary policy aimed at reducing fluctuations in inflation and unemployment levels, while simultaneously maximizing national income. Such policies (out of favor in the era of globalization) attempt to expand demand when unemployment is high, and to curtail demand when inflation accelerates.
Fiscal and MonetaryThe two most frequently used stabilization policies are fiscal policy and monetary policy.
- Fiscal Policy: This policy makes use of government spending and/or taxes, the two components of the government's "fiscal" budget. When government increases or decreases spending, especially by changing the quantity of gross domestic product purchased, then aggregate production, employment, and national income are also affected. Government can change the amount of taxes collected from the public, as well, which then affects the amount of income available to purchase gross domestic product.
- This also triggers changes in aggregate production, employment, and national income.The policy formulated in related to the government revenues with the view of enhancing the economic development by increasing, employment and leading the whole economy forward are known as fiscal policies. since development of monetary and capital market of the developing and poor countries is negligible, the monetary policy undertaken by the central bank for the economic development cannot be successfully implemented. for this the government has to implement appropriate policy. with this as the central view and to improve the state of the economy, the government will formulate fiscal policy. so, the policty undertaken by the government for the managemant of government revenue, expenditure and lone to enhance economy stability and economic development in the economy is known as fiscal policy. the main objective of this is to establish economy stability in the economy by increasing output and employment as monetary policy undertaken by the central bank. the government undertakes verious fiscal policies in order to make economic policies successful. various revenues, public expenditures and lones come under the fiscal policy undertaken by the government. with proper adjustment of such fiscal factors. output, employment, income,etc. can be increase in the economy
- Monetary Policy: This policy involves the total amount of money in circulation throughout the economy, as well as interest rates in financial markets.
By changing the amount of money in circulation, the public has more or
less of an ability to purchase gross domestic product, which then
triggers changes in overall economic activity. Money supply changes also
invariably cause changes in interest rates, which subsequently affect
the willingness and ability to borrow the funds used for expenditures.
Expansionary and ContractionaryStabilization policies can be either expansionary or contractionary, depending on whether the most pressing problem is excessive unemployment or excessive inflation.
- Expansionary Policy: This policy is designed to stimulate the economy and to reduce unemployment by countering or preventing a business-cycle contraction. Expansionary fiscal policy is an increase in government spending and/or a decrease in taxes. Expansionary monetary policy is an increase in the money supply and/or a decrease in the interest rate.
- Contractionary Policy: This policy is designed to dampen the economy and to reduce inflation by countering or preventing the inflationary excesses of a business-cycle expansion. Contractionary fiscal policy is a decrease in government spending and/or an increase in taxes. Contractionary monetary policy is a decrease in the money supply and/or an increase in the interest rate.
A Graphical Illustration
|Stabilizing the Business Cycle|