Business cycles that disrupt economic actiity in the country are not beneficial for the community. On the one hand, upswing may bring windfall gains for the business community and speculators, on the other hand adversely affects the fixed income, middle and working class of the society. Downswing causes widespread unemployment and impoverishes the community. These alternating slumps and booms are not encouraging to the prosperity of the community. Therefore, it becomes imperative to minimise the impact of the business cycles.
The issue of managing the business cycles boils down to the problem of ensuring economic stability in the system. The goal of economic stability might consist in the achievement of the objetives of full employment, avoidance of undesirable volitility in prices and ensuring a sustainable rate of economic growth.
The following are some of the measures to control the business cycle.
1. Monetary Policy: One of the most commonly adopted measures for controlling the business cycle consists of the use of monetary policy. The central bank uses its various instruments of credit control over the monetary and banking system. This objective is to achieved through variation in bank rate, cash reserve ratio, open market operations, moral susasion and direct control etc. This implies control over the quantity of money and credit. The expansion of bank credit makes funds available for involuntary saving and over-investment, the expansion of durable goods industries and the rise of prices and profits. During the thirties monetary policy was discredited as an instrument of economic policy when the central banks could neither control the expansion before 1929 leading to the depression nor initiate reovery after the price crash in the commodity market. Until recently, monetary policy was not much used to control the business fluctuations. Since the fifties, however, it has staged a comeback and has been increasingly used in many countries to combat the inflationary pressures in the economy.
2. Price Control: Irving Fisher suggested a series of measures to achieve stabilization of the business activity. These may be named as price control. It is the rise in prices with the consequent profit margins which induces the business community to expand the scale of operations. In fact, it is no solution at all since business expansion can and does not take place even without any rise in the level of prices. Moreover, the price control would be disliked by people.
3. Price Support: In some countries, particularly in US, the price support policy has made its appearance as a practical policy resorted to fight depression. When prices fall below the minimum guaranteed prices, the government comes to the rescue of the producers by entering in the market as a single bulk purchaser of the commodities at statutorily fixed prices. The success of price support policy requires that the government should have the necessary funds to purchase surplus produce at the officially fixed prices. If the tendency towards falling prices is widespread, the need for funds to buy and store commodities will be enormous. Then the government should be able to find a market to sell the goods purchased and have efficient administrative machinery to efficiently tackle the various problems3 related with the effective working of the price support programme. In this respect the underdeveloped countries stand at great disadvantage. All governments, therefore, cannot manage the scheme. If the depression is widespread and if the government is unable to dispose off the fast accumulating stocks, price support policy will fail without achieving any substantial success.
The issue of managing the business cycles boils down to the problem of ensuring economic stability in the system. The goal of economic stability might consist in the achievement of the objetives of full employment, avoidance of undesirable volitility in prices and ensuring a sustainable rate of economic growth.
The following are some of the measures to control the business cycle.
1. Monetary Policy: One of the most commonly adopted measures for controlling the business cycle consists of the use of monetary policy. The central bank uses its various instruments of credit control over the monetary and banking system. This objective is to achieved through variation in bank rate, cash reserve ratio, open market operations, moral susasion and direct control etc. This implies control over the quantity of money and credit. The expansion of bank credit makes funds available for involuntary saving and over-investment, the expansion of durable goods industries and the rise of prices and profits. During the thirties monetary policy was discredited as an instrument of economic policy when the central banks could neither control the expansion before 1929 leading to the depression nor initiate reovery after the price crash in the commodity market. Until recently, monetary policy was not much used to control the business fluctuations. Since the fifties, however, it has staged a comeback and has been increasingly used in many countries to combat the inflationary pressures in the economy.
2. Price Control: Irving Fisher suggested a series of measures to achieve stabilization of the business activity. These may be named as price control. It is the rise in prices with the consequent profit margins which induces the business community to expand the scale of operations. In fact, it is no solution at all since business expansion can and does not take place even without any rise in the level of prices. Moreover, the price control would be disliked by people.
3. Price Support: In some countries, particularly in US, the price support policy has made its appearance as a practical policy resorted to fight depression. When prices fall below the minimum guaranteed prices, the government comes to the rescue of the producers by entering in the market as a single bulk purchaser of the commodities at statutorily fixed prices. The success of price support policy requires that the government should have the necessary funds to purchase surplus produce at the officially fixed prices. If the tendency towards falling prices is widespread, the need for funds to buy and store commodities will be enormous. Then the government should be able to find a market to sell the goods purchased and have efficient administrative machinery to efficiently tackle the various problems3 related with the effective working of the price support programme. In this respect the underdeveloped countries stand at great disadvantage. All governments, therefore, cannot manage the scheme. If the depression is widespread and if the government is unable to dispose off the fast accumulating stocks, price support policy will fail without achieving any substantial success.
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