Market forces can bring on boom periods where excess demand for goods and

services causes inflation

High inflation can distort business decision making, reduce consumer's

purchasing power and force an increase in interest rates, which can then
cause a recession.
In this instance, unemployment, business failures and other economic and

social problems increases

The government uses two economic stabilisation policies to achieve a strong and
stable level of economic growth, whilst at the same time minimising the harmful
effects of inflation and unemployment.
These policies are known as macroeconomic policies.
This can then be subdivided into two:
Fiscal policy

Monetary policy

The aim of these policies is to help the economy maintain a sustainable rate of
economic growth. They also serve to help sustain the economy for as long as
possible
Fiscal policy:
When a government adjusts its spending levels and tax rates to monitor

and influence a nations economy

e.g. through taxation and public spending, the government can control

price inflation , unemployment rates and interest rate levels

e.g. to reduce inflation rates, the government may institute higher taxes

so that people have a smaller portion of their income to spend

Inversely, they may also give money out to the people to stimulate

economic activity during a recession to increase flow of cash in the

economy.
Monetary policy:
The actions taken by the Reserve Bank of Australia (RBA) to affect

financial conditions in the money market to help achieve economic goals of

low inflation and sustainable growth.
Two types: expansionary and contractionary

Expansionary - actions to lower interest rates and expand supply of

money.
Contractionary - exact opposite.

e.g. to control high inflation, policy makers ( usually an independent

central bank) can raise interest rates and therefore reduce the money
supply
e.g. in a recession, the bank may increase the money supply in the

economy