Economic implications in controlling the business cycle.

Business cycles are wide fluctuations in economic activity over several months or years, these are regular cyclical pattern of economic boom (expansion), recessions, depressions and recoveries. Business cycles can be controlled by using appropriate fiscal and monetary policy.

Talking about the monetary policy in controlling the business cycle one should take into account that the cause of short business cycles are always monetary factors, for the monetary factors may not cause the business cycle but once the cycle occurs, the monetary factors do aggravate it.

 

Where monetary inflation leads to higher prices, higher profits and an optimistic outlook, strengthens the upswings of the cycle whereas monetary deflation will lead to lower prices, lower profits and pessimistic outlook re-in-forces the down swing of the cycle. Some steps should be taken to check and control the monetary factors which aggravate business fluctuations caused by the business cycle. for this, the government may evolve a suitable monetary policy to deal with the situation.

 

So, as monetary supply is concerned its under expansion could be checked by insisting upon proper and adequate cover against note-issue. As regard bank credit, the central bank of the country should utilize the various weapons of control, such as reserve requirements, official interest rates, open market operations, direct controls, special deposits, selective credit controls, marginal requirements and moral suasion.

 

Whenever there is a tendency towards an over expansion of business activity, the central bank should utilize its weapons to check and control expansion of credit. On the contrary whenever there is a tendency towards undue slackening of business activity, the central bank should utilize its weapons to ensure an adequate expansion of the credit.

 

One should also talk about the monetary expansion policy and contractionary monetary policy, where with the expansionary monetary policy, the central bank will increase money in circulation to promote investments, savings, and fighting against unemployment and with the contractionary monetary policy, the central bank will reduce money in circulation in response to distortions, deterioration of assets values, too much wastage of resources and inflation.

 

To sum up with the monetary policy, the successfulness of this policy will depend on whether it has taken control of money, through its supply as it is present on to the people, its cost, and its availability means in circulation or used and not kept. This will help to achieve the official goals of the monetary policy which includes relatively stable prices, low unemployment and financial stability thus crafting the optimal monetary policy.

 

Monetary policy alone cannot control the business cycles, thus its suitable for it to be integrated with suitable fiscal policy to achieve desired results, governments are now in a position to exercise a very great influence on the total volume of outputs in the country.

 

The governments should use the three main instruments of fiscal policy to control the business cycles. If the business shows signs of slackening down, enforcement in fiscal policy instruments should be done to check the down trend and ensure the stability in economy, at such time no levy and new taxes on people and existing ones should be reduced this would leave more money in the hands of the people who should be encouraged to spend in buying additional goods and services to offset the decline in demand and business activity , nota that in a different situation as that described above the inverse is done leading also to inverse effects to those described above adding on that through fiscal policies the government will fund through subsidies in projects of more productive sectors and in public projects.

 

To conclude, there is no single method to control the business cycles, so the two methods which are fiscal and monetary policy should be used simultaneously integrated as we see that monetary policy is easily applied but less effective and that the fiscal policy is more effect but difficult to control and operate

 

References

1.   Economy analysis: Business Cycle and Economic Trends | EssayBiz

2.   The Impact of The Business Cycle (weebly.com)

3.   Control of Business Cycle Fluctuations Measures and Controls (studylecturenotes.com)

4.   Solutions to Problems of Trade Cycle | Control of Business Cycle (accountlearning.com)