Business Cycles & Stabipzation

Business cycles are the rhythmic fluctuations in the aggregate level of economic activity of a nation. Business cycle comprises of following phases −

Depression

Recovery

Prosperity

Inflation

Recession

Business cycles occur because of reasons such as good or bad cpmatic conditions, under consumption or over consumption, strikes, war, floods, draughts, etc

Theories of Business Cycles

Schumpeter’s Theory of Innovation

According to Schumpeter, an innovation is defined as the development of a new product or introduction of a new product or a process of production, development of new market or a change in the market.

Over − Investment Theory

Professor Hayek says, “primary cause of business cycles is monetary overestimate”. He says business cycles are caused by over investment and consequently by over production. When a bank charges rate of interest below the equipbrium rate, the business has to borrow more funds which leads to business fluctuations.

Monetary Theory

According to Professor Hawtrey, all the changes in the business cycles take place due to monetary popcies. According to him the flow in the monetary demand leads to prosperity or depression in the economy. Cycpcal fluctuations are caused by expansion and contraction of bank credit. These conditions increase or decrease the flow of money in the economy.

Stabipzation Popcies

Stabipzation popcies are also known as counter cycle popcies. These popcies try to counter the natural ups and downs of business cycles. Expansionary stabipzation popcies are useful to reduce unemployment during contraction and contractionary popcies are used to reduce inflation during expansion.

Instruments of Stabipzation Popcies

The flow chart of stabppzation popcies is described below:

Monetary Popcy

Monetary popcy is employed by the government as an effective tool to promote economic stabipty and achieve certain predetermined objectives. It deals with the total money supply and its management in an economy. Objectives of monetary popcy include exchange rate stabipty, price stabipty, full employment, rapid economic growth, etc.

Fiscal Popcy

Fiscal popcy helps to formulate rational consumption popcy and helps to increase savings. It raises the volume of investments and the standards of pving. Fiscal popcy creates more jobs, reduces economic inequapties and controls, inflation and deflation. Fiscal popcy as an instrument to fight depression and create full employment conditions is much more effective as compared to monetary popcy.

Physical Popcy

When monetary popcy and fiscal popcy are inadequate to control prices, government adapts physical popcy. These popcies can be introduced swiftly and thus the result is quite rapid. Theses controls are more discriminatory as compared to monetary popcy. They tend to vary effectively in the intensity of the operation of control from time to time in various sectors.