Managing Cyclical Fluctuations

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Cyclical fluctuations are common in all the economies of the world and it is the responsibility of governments to strive to keep the economy in a stable condition so as to avoid extreme waves of booms and recessions. This paper advises the government concerning the use of several macroeconomic policies for the purpose of managing cyclical fluctuations in the economy.


An economic cycle comprises several phases viz. recession, recovery and boom. In the recovery phase, individuals and businesses borrow and invest more causing the aggregate demand to rise up which leads to boom or expansionary pressures in the economy. This boom brings with it problems like inflation and high imports etc. In such a situation, the government needs to take some action through various macroeconomic policies for the purpose of stabilisation of economy. Thus, the recessionary pressures enter the economy characterised by weak investment and business slow down (Smith, 2003). The economy displays several peaks and troughs over a cyclical phase (see Fig 1).
The responsibility of government to stabilise the economy leads it to make use of various macroeconomic policies in order to manage the cyclical economic fluctuations. As an advisor to the government, I would like to recommend the use of monetary and fiscal policies for the purpose of curtailing cyclical fluctuations. Macroeconomic policies like monetary and fiscal policies can be utilised by government to control economic fluctuations. Macroeconomic factors like taxation and government spending fall within the realm of fiscal policy whereas inflation, interest rates, exchange rates and other monetary factors are relevant to the monetary policy. ...
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