Understanding Business: Stabilization and Expansionary Policies

It has been said many times that knowledge is power. Perhaps nowhere is this statement more true than when we discuss business and economic policies. From understanding what causes recessions, to different types of unemployment, when we learn more about the business world and economics as a whole, we are better able to interact and prosper in the business world. Although there are definitely many policies worthy of learning and interpretation, perhaps some of the most important are those which often seem to escape our reach. Among those ideas, two of the most important are stabilization and expansionary policies.

Stabilization policies, despite their importance, are somewhat misunderstood as a whole. Stabilization policies are essentially fiscal and monetary policies. These policies are designed to affect expenditure and recession at various levels. These policies are basically designed with two or three goals in mind. Essentially, stabilization policies are implemented to return the GDP (or Gross Domestic Product) of a nation to the natural, or stable level, thus the term “stabilization policy”. By attempting to return the GDP to a stable level, we cpoan eliminate a recessionary or inflationary gap, one which may be greatly damaging to the economy as a whole.

Of course, the actual type of policy that will be implemented will depend on what type of problem is in need of fixing. When the economy is starting to choke, or entering a recession, expansionary policies that increase expenditure are needed in order to stimulate the economy and get national spending, and thus GDP back on track. On the other hand, some policies may be created with the goal of reducing spending, these policies are designed to target inflation, by reducing interest rates and borrowing.

When we talk about stabilization, we are generally referring to two types of policies. These two types are commonly referred to as either monetary or fiscal policies. As can be guessed from the terms, monetary policies deal with actual decisions about money, including the amount of money in circulation, the value of currency and other such decisions relating to the overall supply of money. Fiscal policies, on the other hand, primarily deal with government spending and thus budget issues that relate specifically to the federal government and it’s spending policies.

Of the two types of policies (monetary and fiscal policy) there are also specific sub-types of these, and they can greatly change the policy as a whole, not to mention the effect that the policies can have. Generally, when we refer to this, we are referring to expansionary fiscal and monetary policies. Expansionary monetary policies generally reduce interest rates, although these are primarily meant to deal with short term interest rates. When we decrease interest rates, as per the basic concept of economics, we can thereby increase spending and attempt to pull an economy out of a recession or downward trend. Expansionary fiscal policy, then, is meant to increase government spending, and also reduce taxes, as this will greatly impact government spending and also contribute to pulling the economy out of a recession, although it may have an undesirable long term effects in terms of inflation and raising interest rates, as the government must, at some point in time, attempt to gain back the money that it has lost, or the economy and the country in question will be subjected to increased amounts of national debt.

While it can sometimes be difficult to keep all aspects of economic and business policy straight, it is necessary to understand these terms if we wish to succeed and better understand all business dealings as a whole. If we simply take the time to learn about stabilization and expansionary policies, we can both a favor to ourselves and a favor to our economy as a whole. The more we learn about the manner in which business operates, the better prepared we are to make an impact in the business world, and succeed wherever we may try to.

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