Page 238 - DECO402_Macro Economics

Unit-26: Kaldor’s Theory of Trade Cycle Contents

5. Difference in planned saving and investment brings .............. . Notes
(a) deficit (b) cycle
(c) instability (d) none of these
6. Cycle can be seen only when none linear saving and investment curves are brought
...................
(a) together (b) separately
(c) detached (d) none of these

26.2 Stabilisation Policies or Measures to Control Trade Cycles

For controlling the ups and downs in the economy many measures and suggestions are employed
from time to time. Their objective is to stabilize economic activity for saving from ill-effects of boom
and recession. For it below mentioned three measures are adopted.

1. Monetary Policy

In form of a measure to control business ups and downs monetary policy is run by the central bank of
a country. Central bank adopts many measures to control the quantity and quality of credit. During
boom, for controlling the expansion of money supply it increase bank rate, sells securities in open
market, increases reserve ratio and adopts many selective credit control measures like increasing limit
requirements, and regulating consumer credit etc. hence bank adopts expensive monetary policy.
Taking loan by business and trades becomes expensive, difficult and selective. In this manner, efforts
are made to control more quantity of money supply in the economy.
For control recession or depression, central bank adopts cheap or easy monetary policy. For increasing
the reserve of commercial banks, it reduces bank rates and interest rates of the banks. He buys securities
from the open market. It reduces limit requirements on loans and motivates the banks for giving loans
to consumers, businessmen, traders etc.

Limitations of Monetary Policy
But monetary policy is not very effective in controlling boom or depression. If boom is due to cost
push factors then it will not be effective in controlling inflation, total demand, production income
and employment. As far as depression is related, experience of the great depression of 1930 tells that
when there is pessimism in traders then success of monetary policy does not happen at all. In such
situation they do not have at all the tendency to take loan, even if interest rates are very less. In this
way, when there is reduction in income of which consumers and which are unemployed they reduce
their consumption expenses. In such situation neither central bank nor commercial banks can motivate
the consumers to increase total demand. In this manner success of monetary policy is very limited in
controlling economic ups and downs.

2. Fiscal Policy

Monetary policy alone does not have the capacity to control trade cycle. That is why it is added
to compensatory Fiscal policy. In born fiscal measures are very effective in controlling excessive
government expenditure, personal consumption expenditure and personal and public investment.
At the other side during depression they are helpful in increasing government expenditure, personal
consumption expenditure and personal and public investment.

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