Question

1) Explain the difference between ‘automatic stabilisation’ and ‘discretionary
stabilisation’.
2) Mention four reasons why a government may have difficulty in implementing
discretionary stabilisation successfully.
3) Explain why monetarists would argue that control of inflation is the most effective
method of achieving growth in the economy.
4) Briefly explain the concept of hyperinflation. Briefly explain three likely consequences
of hyperinflation on an economy like Zambia?

Answer 1

Automatic stabilisation - It tells how variations in the real GDP can be reduced, with the help of budget plans of government specially policies related to welfare spending and income tax.It is a policy that changes automatically to make changes in GDP stable.

Discretionary stabilisation- This is a policy which is based on policy maker's judgements in a situation , in contrast to policies made by fixed rules.It reflects the steps taken in regard to fluctuations in the economy on the basis of judgement and not by following fixed rules , to solve the problem in a unique way.

The difference between automatic and discretionary stabilisation are-

1) Automatic stabilisation respond immediately when economy faces economic variations without waiting for any government official to take any action. Whereas in discretionary stabilisation there is a time gap . Before taking any action government first study the issue and then take steps or follow procedures to solve the problem.

2) Automatic stabilisation are restricted to focus on management of country's aggregate demand whereas discretionary stabilisation focus on other , specified areas of the country.

3) Automatic stabilisation process exists before the economic variations occur whereas discretionary stabilisation process start after the fluctuations have begin.

4) Due to their respective nature, Automatic stabilisation is not applicable to every economy problem whereas discretionary stabilisation allows flexibility of policy makers.