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Stabilization Policies
Business Cycle
Business Cycle refers to a wave like
fluctuation in the overall level of economic
activity particularly in national output ,
income , employment and prices that occur
in a more or less regular time of sequence.
1. Monetary Policy
2. Fiscal Policy
C1
ne
Demand
Demand or Cost
Li
n
tio
fla
In
Demand Line
w1 w2
Wages
Fiscal Policy to Control
Inflation
Taxation as an anti-inflationary measure
should be used carefully
Inessential and unproductive expenses of
the government should be cut down
Public Borrowing from Non Banking lenders
Other factors as the role in the economic
development
Fiscal Policy to control
Depression
Reduction in Personal Income tax and
corporate tax
Increase in Public Expenditure
Encouraging Investment in public work
programmes, social and economic
overheads
Social Security Schemes , unemployment
insurance , pension, subsidies should be
provided
Fiscal Policy as an instrument to fight
depression and create full employment
conditions is much more effective than the
monetary policy , since it affects the level
of effective demand directly , while
monetary policy attempts to do it only
indirectly
Physical Policies and Direct
Control
Physical Policy
When monetary and fiscal measures are inadequate to
control prices govt. resorts to direct control.
During wars etc. when inflationary force are strong price
control involve, imposing ceilings in respect of certai
prices and prices are to be stopped from rising too high.
Price control is done by control of distribution of
commodities trhough rationing.
In U.S. price control takes the form of price support
programme in which prices are prevented from falling
below certain levels considered fair.
Under certain circumstances govt may even resort to dual
pricing.
Instruments of Physical Policy
Direct controls are imposed by govt. to ensure
proper allocation of scarce resources like food,
raw materials, consumer goods, capital goods
etc.
Govt. can strictly forbid or restrict certain kinds
of investments or economic activity.
During the period of inflation govt. can directly
exercise control over prices and wages.
Monetary and fiscal controls will have a general
impact on the economy while physical controls
can be employed to affect specific scarcity
areas.
Types of Direct controls
1) Control over consumption and distribution
through price control and rationing.
2) Control over investment and production
through licensing and fixing of quotas etc.
3) Control over foreign trade through import
control, import quotas, export control etc.
During war period there will be a terrific
increase in the demand for certain commodities
causing a steep rise in prices of commodities,
this is intensified by war financing, allowing
surplus purchasing power in the economy.
Price control attempts to check the inflationary
rise in prices, enable all citizens to get a
minimum of certain basic necessaries of life
and serves as an effective instrument of
resource mobilization.
Govt. may fix ceiling prices for various
commodities.
If the govt. doesn’t revise such policies from
time to time, it may lead to hoarding and
black-marketing.
It requires govt. to exercise some control
over supply and demand.
Direct link between commodity market and
factor market during emergency conditions
govt. can resort to control of profit, interest,
rent and wages.
Dual Pricing – Wherein two prices prevail in
the market at the same time foer the same
product out of which one is a controlled
price for the lower income group and the
other is a free market price determined by
the conditions of demand and supply.
Administered Prices – Fixed by the govt. for
a few goods like steel, aluminium,
fertilizers, cement etc. which serve as raw
materials for other industries.
Control over investment and production is
equally essential.
To overcome short – term scarcity
generally essential goods are imported to
meet the excess demand.
Advantages of Direct
Controls
1) They can be introduced quickly and
easily, hence the effects of these can be
rapid.
2) Direct controls can be more
discriminatory than monetary.
3) There can be variation in the intensity of
the operation of controls from time to
time in different sectors.
Disadvantages
1) Direct controls suppress individual initiative
and enterprise.
2) They tend to inhibit innovations, such as new
techniques or production, new products etc.
3) Direct controls may include speculation which
may have destabilizing effect. It thus
encourages the creation of artificial scarcity
through large scale hoardings.
4) Direct controls need a cumbersome, honest
and efficient administrative organization if
they are to work effectively.
5) Gross disturbances may appear when the
controls are removed.
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