Lesson 38 ª


 

 

 

 

 

   

 

Theories on economic cycles

There are numerous theories that try to explain the reason for economic cycles. Amongst others, we can point out:

Changes in productivity: fluctuations start and respond mainly to changes in the levels of productivity due to tecnological innovations.

Monetary Cycles: variations in the quantity of money provoke movement in the level of demand and production. In the long term, the prices are adjusted so that the offer of money, measured in real terms (refined by the price effect), return to their initial level, cancelling the initial positive effect.

Economic cycles and stabilized politics

The government's economic policy aims to mitigate the fluctuations producing cycles, with the intention of  achieving a  stable growth  rate in the  long term, which requires prices controlled:
It is a bad phase of the cycle with low unemployment, a high-inflationary phase (ends generating a series of mismatches in the end leads to a phase of economic stagnation). 

Among the various stabilization measures to be taken by the government, there is fiscal policy and monetary policy.

In state of recession:  reducing taxes, increasing public spending, increased money supply, etc.. These measures can be taken individually or jointly.

In state of expansion:  The government will take measures contrary to the above, ie reduction of public spending, monetary tightening, and so on.

Taxes already operate as stabilizers: 

If low income reduces tax revenues (which helps reduce the negative impact of the fall) and when it rises increases recovery (moderate growth in th economy).
Government intervention in the economy with the intention of counteracting the  movements  of  business  cycles has   many  detractors, in fact, the results obtained with these   policies  have  historically been   at times quite poor. 

Critics argue the public that governments tend to focus their demand action policies, which have little  long-term  effect on the level  of output or employment. Understand why that would be more effective supply-side policies.