What Is a Stabilization Policy?

Stabilityization policy is also called "countercyclical policy".

Stability policy

Right!

stability

Adopted austerity fiscal policy (reduced government spending and increased taxation) and monetary policy (reduced money supply to increase interest rates) during the boom period; expanded fiscal policy (increased government expenditure and tax reduction) and

The government maintains the functions of full employment, stable prices, balanced international payments, and stable long-term economic growth. This is one of the main economic functions of the government. But there are different schools of thought about how the government exercises this function.

Economic decision requires stability policy

First, aggregate demand does not rise smoothly along the curve of potential GDP when full employment is achieved, but fluctuates continuously around this curve. When aggregate demand is not enough to buy all the potential output of the economy and society, unemployment will rise and inflation will fall. The opposite is true when aggregate demand is excessive.

Second, when aggregate demand is inadequate, the adjustment of inflation and unemployment is slow, and this slow adjustment reflects two related problems: limited elasticity of falling wages (and many prices), and great inflation inertia. This increase in inertia is due to rising wages and prices, which have led households and businesses to start anticipating, planning, and implementing future economic growth, which has led to sustained inflation.