Question

If Business Cycles were Really Inevitable, What Purpose would Macro Policy Serve?

Answer 1

Introduction

Business cycles are a part of the overall economic outlook of any country. Most countries across the globe, see times of increased inflation or recession depending on the business cycle in which they currently fall.

Most economists rightly, argue that these cycles tend to be inevitable and are necessary for maintaining equilibrium for a larger part of the cycle respectively.

The concepts of inflation and recession are such that these tend to have an overall impact on the society. During inflation, the demand for goods and services is higher than the supply. This leads to a situation wherein the prices of goods and services goes on increasing.

Further during recession a lack in demand leads to more problems for the society, since producers cut down on their spending and workers would lose their jobs.

Yet, macroeconomic policy is followed for reasons as described as follows:-

Case Specifics:-

If Business Cycles were Really Inevitable, What Purpose would Macro Policy Serve?

Macro-Economic policy is required to break the business cycles which otherwise unchecked, would not be able to correct itself.

The policy also decreases the time taken to recover from each of the cycles of inflation or recession. A typical business cycle reflects period of inflation, constant growth & recession. Macroeconomic policies are widely used to correct the problems of hyperinflation or recession respectively.

To understand why Macro Economic Policy is important it is important to assess their impact on inflation and recession respectively.

During Inflation, the prices of goods and supplies increases due to increased demand. With the help of macroeconomic policy, the government decreases the flow of money into the economy. This results in a check of demand and reduces the economic pressure on the country relatively quicker than the market places would allow for. The Exact opposite happens during recession in which the government takes steps such as infusion of money, reduction in interest rates and others to allow higher flow of money into the economy.

Thus, to allow for easier recovery, Macroeconomic policies are important tools to tackle Business Cycles respectively.

Please feel free to ask your doubts in the comments section.