Implication of Business Cycles on Fiscal and Monetary Policy.

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Question: Discuss the implication of business cycles on fiscal and monetary policy. Answer: Business Cycle: Market economies have regular fluctuations in the level of economic activity which we call the business cycle. In other words, the business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. A business cycle is identified as a sequence of four phases: 1.Contraction (A slowdown in the pace of economic activity) 2.Trough (The lower turning point of a business cycle, where a contraction turns into an expansion) 3.Expansion (A speedup in the pace of economic activity)

4.Peak (The upper turning of a business cycle)
Fiscal Policy: Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures. When the economy is sluggish, the government may cut taxes, leaving taxpayers with extra cash to spend and thereby increasing levels of consumption. An increase in public-works spending may likewise pump cash into the economy, having an expansionary effect. Conversely, a decrease in government spending or an increase in taxes tends to cause the economy to contract. Fiscal policy is often used in tandem with monetary policy. Until the 1930s, fiscal policy aimed at maintaining a balanced budget; since then it has been used "countercyclical," as recommended by John Maynard Keynes, to offset the cycle of expansion and contraction in the economy. Fiscal policy is more effective at stimulating a flagging economy than at cooling an inflationary one, partly because spending cuts and tax increases are unpopular and partly because of the work of economic stabilizers. See also business cycle. Monetary Policy: Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government...
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