Question

Discuss the tradeoffs between stability & growth presented by the use of fiscal & monetary policies. Discuss arguments in favor of & opposed to the use of discretionary policy to manage the business cycle. Provide at least one example of each.

Answer 1

There is a strong trade-off between the growth and stability in the economy when the monetary and fiscal policies are followed. The stability implies that there must be a low level of inflation while the growth rate is accompanied by the rise in inflation. The expansionary fiscal and monetary policies are followed to drive up the aggregate demand and employments or growth rate. Here when demand curve shifts right, there is a rise in the price level as well. thus growth is achieved but side by side we have to sacrifice the objective of price stability.

The discretionary fiscal policy refers to the deliberate change in the expenditure and taxes of government. it is a change in the policy in response to the change in the economy.

The discretionary policy depends on the judgements and situations, thus such policy is customised and is changed according to the prevailing conditions and situations. The discretionary policy can effectively tackle the economic crisis. The great economic recession of 2008 was tackled with the help of discretionary policy.

But these discretionary policies contain the time lag which makes these policies ineffective and the over the period of time, these economic conditions might change and discretionary policies would cause the advrse outcomes.