Stabilization Policies and Business Cycle

Stabilization Policies and Business Cycle
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Stabilization Policies and Business Cycles
Stabilization policies are macroeconomic strategies undertaken by governments and central banks to counter business cycle fluctuations and prevent inflation and high rates of unemployment in the economy. These financial and economic policies monitor the business cycle and adjust the interest rates to control aggregate demand in the country. The main aim of is to avoid considerable variations in the gross domestic product (GDP). Stabilization policies are categorized into fiscal and monetary policies. Budgetary strategies make use of government spending and taxation to influence aggregate demand. The government may choose to increase or decrease spending hence affecting aggregate production, employment and the national income (Mankiw, 2014). Additionally, the government can decide to change the amount of taxes collected, which affects the amount of disposable income available for purchases. Monetary policies involve manipulating the total amount of money in circulation throughout the economy, as well as the interest rates in the banking sector. By regulation the number of funds available to the public, these policies influence a consumer`s purchasing power. Furthermore, changes in interest rates directly affect the willingness and ability of the population to borrow. Expansionary policies are formulated to stimulate the economy by increasing government spending and reducing taxes to reduce employment and prevent business-cycle contractions.

Contractionary policies are designed to dampen the economy through decreased government spending and increase in taxes.
Stabilization policies in the United States have had both positive and negative impacts on the economy since their inception. The effectiveness of these policies cannot be measured by one aspect, hence the need to look at their history. The U.S. started to use stabilization policies during the Great Depression to promote economic growth and stability (Mckay & Reis, 2016). The government increased its spending during in this period, which saw the economy recover fast after an increase in military spending, which translated to an increase personal income and eventually the Depression was no more. However, in the 1960s and 1970s, the government increased expense resulted in increased 9infaltion as wages and prices rose due to a strong consumer spending.
References
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
McKay, A., & Reis, R. (2016). The role of automatic stabilizers in the US business cycle. Econometrica, 84(1), 141-194.