Question

Some would argue that without government intervention, the natural business cycle would become more volatile; creating an economy of booms and busts.

Do you think government can actually help smooth-out growth cycles?

Answer 1

Government intervention plays a major role in stabilizing the economy when it is facing a recession. Government through its fiscal and monetary expansion can reboot the demand in the economy. The aggregate demand in an economy is a function of consumption, investment, government taxes, and imports. Consumption itself depends on disposable income, the govt through a decrease in taxes can lead to an increase in consumption and increase it when trying to adopt a contractionary fiscal policy. Similarly, the interest rate can be adjusted to adjust the investment demand in an economy, generally, when the interest rate rises, it leads to a reduction in investment and vice versa.

Also, the money supply can be adjusted in order to affect spending by the economy. An increase in the money supply will make it available to have more money to invest and hence increase the aggregate demand in the economy.

Govt has a lot of power in its hand but it is important to thoroughly analyze the impact of each policy and to implement it properly. There are many instances when govt intervention saved the economy from crisis.