Theory of Economic Fluctuations Essay

The variation may be economic growth, it may be decreasing, and it may be facing a recession also. The Gross Domestic Product (GDP) of the country is calculated every sum of revenues earned in the industries that are being run in the country and businesses too, the difference between the capacities of exports and imports is considered too. Other investments made by the country are also considered to measures the economic variations (McCallum 27-60). The GDP of the current year is compared previous year to determine whether the economy growing or falling. Fluctuations in the economy are also called business cycles, for instance, in the business cycle a recession is the period that the country declines reals incomes in a bid to raise employment level. Fluctuation in the demand and supply may happen because of a number of reasons.

In Short-run economic activity fluctuates from year to another (Sutherland). Over the years the production of goods and services rises, the fluctuation s become irregular and unpredictable and in some years normal growth is not realized. The will be two causes in the fluctuations of the economy of the, one of them, is the shift in aggregated demand. For instance, in the short run, the aggregated demand causes variation s in the economy’s revenue in matters of goods and services. This will also affect the other banks that also borrow money from the central bank in the country. This becomes hard for individuals and firms of the country to borrow too much money from the central bank, and other measures are considered to earn money. The Categories of the Monetary Policies Monetary policies are regulated by the central bank of the country and sometimes also influenced by the national government.

Different approaches are employed to regulate the money supply in the economy (McCallum 27-60). There mainly two types of monetary policy that are expansionary monetary policy and contractionary monetary policies. Reduce the lending targets to minimize the cost of mortgage interest repayments. This consequently encourages the spending and gives the households a higher disposable income. iii. The body might tend to lower the interest rates to minimize the incentive to save. iv. The lending institution may not pass the base cut from the central banks. iv. This with depend on components of the aggregated demand, for instance, in a recession period a country may face falls in exports will discourage the consumer spending. Contractionary Policy The contractionary monetary policy is the economic policy that fights inflation in the country’s economy, it involves reducing the money supply in order to increases lending rates by banks and decreases the country GDP.

Goals of Contractionary monetary policy. When unemployment is higher in the country the demand for goods and services also reduces thus making the economic contraction more severe (BAUM, CAGLAYAN and OZKAN 202-225). The other sensitive limitation of the monetary policy is slowing the production when the production is reduced in the economy as a result of slowing the economic engines to reduce the money supply, more investments capital and minimized demand for goods and services are the defects. Once a firm slows down the production it can very hard to ramp it up to level it was. If the policy tightens the economy more than intended then businesses organizations can limit the planned expansions, this can take the economy of the country into the recession period. Financial Policies of the State Financial policies of the state are the policies set by the national government in matters of spending and revenues in the country’s economy for both the private and public sectors.

The fiscal Policy The fiscal policy is the use of government spending and the way the taxation is carried out to influence the economy. The matter pertaining to the goods and services purchases, payment transfer, and taxes collection are decided by the government then is said to engage in fiscal policy (Hansen). The fiscal policy, however, mainly deals on the impact on the effect of the changes in the state budget. In the matters of economics, the fiscal policy is said to be tightened when or in contraction when the state spending is lower than state revenue. In this kind of scenario, the government budget is said to be surplus. The effect monetary and financial policies of the state on the economic fluctuations The monetary policy and financial policies of the state can impact many things on the economic fluctuations of the state.

First of there is a general need to stabilize the economy of the state through this is almost practically impossible. There must be variation in the economy of the state but a growth is what every state would wish for. The fluctuations changes in the states are seen in the economy includes recession, peak (when the economy is at the highest level), and trough (when the economy of the state has fallen to the lowest level). There are a number of causes that lead to this kind of changes in the economy as seen in the previous discussion. The fiscal policy guarantees that the monetary policy does not become the cause of economic fluctuations, with the aid of medium-term orientation. The fiscal policy provided by the state can promote macroeconomic stability, this is realized by sustaining aggregated demand and private sector output during the trough period of the economic fluctuations.

An automatic fiscal stabilizes is used on the government budget during economic fluctuations, they do not require short-term decisions the other policy-makers. For instance, the taxations and transfer payments are linked to cyclical places directly in the economy, it is then adjusted in a way that enables aggregated demand and private sector to be stabilized. Negative impacts on monetary and financial policies of the state on the economic fluctuations. However, these types of measures should well effective and targeted in addressing the real causes. Work cited Bade, Robin, and Michael Parkin.  Foundations Of Economics. Boston: Pearson Addison-Wesley, 2011. Print. Sept. Davis, J. Scott. The Asymmetric Effects Of Deflation On Consumption Spending: Evidence From The Great Depression.  Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Papers 2015. Print. McCallum, Bennett T.

Monetary Policy In A Very Open Economy: Some Major Analytical Issues.  Pacific Economic Review 19. Web.