Question

3) You have just studied two chapters on the determinants of economic growth. The two discussion questions are centered on the ability of a government using monetary policy and to some extent fiscal policy to stabilize the economy (capitalistic system). After your reading of articles, doing problems, and thinking about the discussion Questions what role do you think governments play in stabilizing the macro economy? This actually is an important question for all policy makers and citizens alike. I am truly interested in your thoughts.

Answer 1

The theoretical rationale for stabilization function of the government is derived from the Keynesian proposition that a market economy does not automatically generate full employment and price stability and therefore the government should pursue deliberate stabilization policies.

The stabilization function is one of the key functions of fiscal policy and aims at eliminating macroeconomic fluctuations arising from suboptimal allocation.

Government stabilization intervention may be through monetary policy as well as fiscal policy.monetary policy has a singular objective of controlling the size of money supply and interest rate in the economy which in turn would affect consumption,investments and prices.

Fiscal policy for stabilization purposes attempts to direct the actions of individuals and organisation by means of its expenditure and taxation decisions.

Government expenditure injects more money into the economy and stimulates demand.Taxes reduce the income of people and therefore reduce effective demand.