Question

How would you picture the pattern of economic activity for the typical capitalist econom and what is the pattern called? (5 points). What is discretionary macroeconomic stabilization policy? Why is it important? Explain. (5 points).

Answer 1

Meaning of a Capitalist Economy and the Economic Pattern which it follows: -

A capitalist economy, is one wherein the the forces of demand and supply help in deciding critical economic variables such as the total production, prices of goods sold and what goods are manufactured in a country.

It relies on simple market-based economics in which as the demand for a certain good increase so does its supply as producers come in to realize profits. There are no barriers to trade, and companies are free to enter and exit at any point of time. The core benefits of having such a society is that the interest of the consumers becomes of prime importance to the market. Each producer tries their best to improve technology and customer experience and customer indeed becomes the king in such markets. It leads to great efficiency in the market, and most developed economies such as the United Kingdom, United States of America etc, are moving over to this economic system wherein demand for goods and services and consumer satisfaction is of prime relevance. In such an environment, those companies which are able to fulfil the needs of consumers survive while others eventually perish.

There are numerous economic patterns for countries to choose from these include Ethnic or religiously affected patterns, Savings Based Pattern in which the concept of Saving is giving due consideration or Free Trade Based, in which free trade and lack of government control is given prime importance.

In the case of capitalism, a free trade-based pattern is followed, in which we expect great gains in volume of sales and there are no restrictions on sale and purchase and entry and exit of companies.

Discretionary macroeconomic stabilization policy and its importance: -

There are two primary methods, through which macroeconomic stabilization takes place in any economy. This is through the government’s fiscal policy and the Central Banks Monetary Policy.

Discretionary Policy is one, in which the government or the Central Bank uses their own judgement to decide the way and manner in which the economy is to function rather look at what economists have said in their theories.

Real conditions require case by case analysis and corrections instead of following one single approach which has been given in books.

For example, quite recently, the Federal Reserve of the Untied State as well as the government took serious measures to facilitate growth even before the economy had entered into a crisis due to the Corona Virus Pandemic. The importance arises for discretionary policies as these are taken in anticipation of crisis and not after the crisis has happened itself. It is a more proactive approach of dealing with macro-economic issues of recession or inflation as the case maybe.

In today’s scenario, the Federal Reserve and the Government anticipated that a recession would come as the entire economy is shut down and the resulting effect would be reduced demand and overall GDP may fall. Accordingly, the proactive approach was to reduce interest rates and set in transfer benefits for individuals to allow for better conditions in the country.

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