CS Question #1: What was the Stabilization Theory?

Fiscal policy influences the actions of individuals and companies. It uses different methods of spending and taxation. Usually, the government will increase or decrease spending when using fiscal policies. For example, the government can create public works programs. This spending then stimulates other forms of economic activity. In the 1930s, many public works projects were created in the United States. The government spent money to build highways, bridges and other forms of infrastructure. This created an increase in the production of raw materials such as steel and concrete. These public works projects also strengthened the transportation system. Another method of fiscal policy is taxation. Taxation can make some activities more expensive and others less expensive. If the government places high taxes on investment, it slows the rate of investment. This slows the rate of borrowing, which then slows the economy as a whole. Lower taxes have the opposite effect. A government can also use tax policies to create or assist new and developing industries. The U.S. government currently does not tax Internet transactions. This action is an effort to help that industry grow.

Monetary policy attempts to control the economy using interest rates. This policy can also change the amount of available currency within the economy. The Federal Reserve Board sets the interest rates in the United States economy. When the Fed increases interest rates, borrowing becomes more expensive for individuals and companies. High interest rates slow investment. This slows or halts the rate of inflation. The availability of currency also influences a nation's economy. In theory, there is a set amount of available currency in an economy. That money circulates at a set speed. The money is then available to carry out transactions at prevailing market prices. Adding more money into an economy can affect the prices in that economy.

CS Question #3: What is monetary policy?

The goal of stabilization policy is to create full employment and low inflation. It also creates a balance of wages for all workers. As nations began to use stabilization policies, they passed laws to enact some of them. The United States passed The Full Employment Act in 1946. This Act made the federal government responsible for creating prosperity in the U.S. economy. These policies were very popular in the 1950s and 1960s. As time passed, stabilization policies became less popular. People began to realize that full employment was not possible in a growing economy. When an economy grows, new business opportunities are created. These companies require a pool of available workers in order to operate. If the economy is in full employment, there are no workers available. It also became apparent that inflation created just as many problems in the economy as unemployment did. Many of the original ideas behind the Stabilization Theory are still used in today's economy. The Federal Reserve currently uses interest rates to speed or slow the U.S. economy to control inflation and avoid economic recession.

CS Question #4: What are the goals of stabilization policies?

Further Thought:

1. What is laissez-faire economics?
2. How does the interest rate affect the overall economy of a nation?
3. Why is full employment impossible in a growing economy?