Question

There are pros and cons of using monetary and fiscal policy tools to stabilize the economy.

1. Explain the main arguments in favor of economic stabilization during recessions. Explain why policy lags could make stabilization policies counterproductive.
2. What are the justifications given in favor of more government involvement in the market economy? What are the reasons given in favor of less government involvement in the market economy?

Answer 1

Favourable situation: During recession government basically use two tools.
i. Monetary policy by reducing the interest rate and
ii. Fiscal policy by investing in infrastructure.

Policy lags: It is because my the time of implementing the policies situation may vary.
So, policy lags could make stabilization policies counterproductive.

More government involvement:

1. Social security: Redistribution of monetary funds collected from the taxpayer later distributed by the government to the or needy people increase the social security of the country.

2. Government spending on the infrastructure: It tells the country to cope up the recession.

3. Government intervention: It can reduce unemployment.

Less government involvement:

1. Government can take wrong decision because of the pressure political party. So, the less government involvement is favourable.

2. Individual freedom can be compromised due to the more government involvement. So, the less government involvement is favourable.

3. More government involvement can bring the problem of price ceiling.