Despite
their usefulness, macroeconomic policies have been known to lead to cyclical
fluctuations in the level of economic activities. Policy-induced cycles are generally classified into three: one is
a result of ‘political merchandising’, another follows from ‘alternative policy
goals’ of the government, and, a third is a result of misguided stabilization
policies.
their usefulness, macroeconomic policies have been known to lead to cyclical
fluctuations in the level of economic activities. Policy-induced cycles are generally classified into three: one is
a result of ‘political merchandising’, another follows from ‘alternative policy
goals’ of the government, and, a third is a result of misguided stabilization
policies.
Political Merchandising occurs
when in order to endear itself to the hearts of voters; the government embarks
on an expansionary fiscal (and monetary policy) in the pre-election period.
This led to increase in income and employment and creates a favorable business
environment, all of which combine to increase the chances of a re-election.
However, the expansionary policy ultimately creates well seated, it would
embark on contractionary policies to remove the inflationary pressures created
by the pre-election period expansionary policies. Such policies will bring
about a depression in the level of economic activities. Thus, through its
politically motivated policies, the government has unwittingly destabilized the
economic system and help to generate oscillations in the level of economic
activities.
when in order to endear itself to the hearts of voters; the government embarks
on an expansionary fiscal (and monetary policy) in the pre-election period.
This led to increase in income and employment and creates a favorable business
environment, all of which combine to increase the chances of a re-election.
However, the expansionary policy ultimately creates well seated, it would
embark on contractionary policies to remove the inflationary pressures created
by the pre-election period expansionary policies. Such policies will bring
about a depression in the level of economic activities. Thus, through its
politically motivated policies, the government has unwittingly destabilized the
economic system and help to generate oscillations in the level of economic
activities.
Alternative Policy Goals are
basically associated with policy trade-offs. If an economy is in a recession
for example, unemployment is usually identifies as a major problem. This often
leads to the government adopting expansionary macroeconomic policies. However,
though such policies may be able to remove unemployment significantly, they
often lead to inflationary pressure. Thus the problem of unemployment may give
way to that of inflation. To counter the new development, the government may
engage in contractionary policies. But again this will remove inflation but may
generate unemployment. Thus, alternating between expansionary and contractionary
policies in the bid to solve macroeconomic problems often generate business
cycles.
basically associated with policy trade-offs. If an economy is in a recession
for example, unemployment is usually identifies as a major problem. This often
leads to the government adopting expansionary macroeconomic policies. However,
though such policies may be able to remove unemployment significantly, they
often lead to inflationary pressure. Thus the problem of unemployment may give
way to that of inflation. To counter the new development, the government may
engage in contractionary policies. But again this will remove inflation but may
generate unemployment. Thus, alternating between expansionary and contractionary
policies in the bid to solve macroeconomic problems often generate business
cycles.
Finally,
sometimes, the government implements policies to dampen cyclical fluctuations
in the level of economic activities and stabilize income and output at a
desirable level. However, such short-run stabilization policies are often
misguided and ill timed so that rather than remove or reduce cyclical
fluctuations, they tend to worsen them.
sometimes, the government implements policies to dampen cyclical fluctuations
in the level of economic activities and stabilize income and output at a
desirable level. However, such short-run stabilization policies are often
misguided and ill timed so that rather than remove or reduce cyclical
fluctuations, they tend to worsen them.
