Page 239 - DECO402_Macro Economics

Macroeconomic Theory

Notes Policy during Boom
Following measures are adopted during boom. For reducing demand for goods and services
government cut down unnecessary expenses on non-developmental activities. In it there is a ban on
personal expenses also, which depends on government demand for goods and services. But cutting
down government expenditure is difficult. Then it is not possible to differentiate between necessary
and unnecessary government expenditure. That is by this measure is completed by karaadhan. For
reducing personal expense, government increases rates of personal company and goods taxes. When
income is more than government expenditure then government adopts the policy of surplus budget.
It may be done by either increasing tax rates or by reducing government expenditure or by both. It
reduces income and total demand through opposite reaction of multiplier.
Another fiscal policy which is often adopted is taking loan from the public, effect of which is to reduce
money with the public. Then repayment of public debt should be done and when economy stabilizes
then payment should be postponed till any future date.

Task Express your thoughts about Kolder’s theory of trade cycle.

Policy during Depression

During depression government increases public expenditure and reduces taxes and adopts the policy of
deficit financing. These measures increase total demand, production, income, employment and prices.
Encrease in public expenditure increases total demand for goods and services and brings an increase
in income through multiplier. Public expenditures are done on roads, drains, dams, parks, schools,
hospitals and other construction works. They create demand for labour and personal construction
industries and are helpful in reviving them. For inducing demand for consumer goods industries
government also increases its expenditure on measures like unemployment insurance and social
security. For deficit financing, loan taking by the government and idle money lying with financial
institutions are used in investment plans.

Conclusion

Effectiveness of each cyclical fiscal policy depends on applying the policy work at right time and
nature, quantity and organisation of public construction works.

3. Direct Controls

Objective of direct controls is correct allocation of resources for price stability. They are for influencing
the important points of the economy. They influence special consumers and producers. They are in
form of rationing, licensing, price and wage controls, export tax, exchange control, quota, monopoly
control etc. They are more influential for removing obstacles and shortcomings created by inflationary
pressures. But their success depends upon a skilled and loyal government, else black marketing,
corruption, long queues and speculation may arise from them. Hence they must be used only during
crisis like war, bad crops, hyper inflation etc.

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