BUSINESS CYCLE AND

STABILISATION
BUSINESS CYCLE
Business cycle refers to a wave like fluctuation in the
overall level of economic activity particularly in
national output, income, employment and prices.

It is a rhythmic fluctuations in the aggregate level of

economic activity of a nation.
PHASES OF BUSINESS CYCLE
Depression, Contraction or Downswing

Recovery or Revival

Prosperity or Full Employment

Boom or Over full employment or Inflation

Recession – A turn from prosperity to depression

CAUSES OF BUSINESS CYCLE
Good or bad climatic conditions

Business confidence, psychological factors

Over Optimism or over pessimism

Under consumption or Over consumption

Non – monetary factors such as war, earth quakes,

strikes, drought, flood etc.
 MEASURES TO CONTROL
BUSINESS CYCLES
Monetary measures

1. Monetary policy and the expansionary phase

2. Monetary policy and the phase of depression

Fiscal policy

Physical controls

Miscellaneous measures
 STABILISATION POLICIES
Economic policies undertaken by governments to
counteract business – cycle fluctuations and prevent
high rates of unemployment and inflation

The two most common stabilisation policies are Fiscal

and Monetary

Expansionary policies are appropriate to reduce

unemployment during a contraction and contractionary
policies are aimed at reducing inflation during an
expansion
CONT…
Stabilization policies are government actions,
designed to fix the unemployment and inflation
problems created by business – cycle instability

During periods of high or rising unemployment

associated with business cycle contraction, the
appropriate action is to stimulate the economy
through expansionary policies.
GRAPH
WHAT ARE THE DIFFERENT INSTRUMENTS
OF ECONOMIC STABILITY ?
1. Monetary policy

2. Fiscal policy

3. Physical policy or direct controls

 MONETARY POLICY
Monetary policy is a part of over all economic policy of
a country

It deals with the total money supply and its

management in an economy

It is essentially a program of the central bank to

control and regulate the supply of money with the
public
 FISCAL POLICY
Fiscal policy is an instrument to fight depression and
create full employment conditions is much more
effective than the monetary policy

It affects the level of effective demand directly, while

monetary policy attempts to do it only indirectly.
 PHYSICAL POLICY
When monetary and fiscal measures are inadequate to
control prices government resorts to direct control

Price control is done by control of distribution of

commodities through rationing

Under certain circumstances government may even

resort to dual pricing.
 REFERENCES
Scribd.com

http://www.scribd.com/doc/29262187/Business-Cycle-
and-Stabilization-Policy

• Wikipedia.org

http://en.wikipedia.org/wiki/Stabilization_policy
THANK YOU