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Fall 2013 smu mba assignment help of mb0042 Q1. Economic stability implies avoiding fluctuations in economic activities. It is important to avoid the economic and financial crisis. The challenge is to minimise the instability without affecting productivity, efficiency, employment. Find out the instruments to face the challenges and to maintain an economic stability

Answer: A dynamic market economy necessarily involves some degree of instability, as well as gradual structural change. The challenge for policy makers is to minimise this instability without reducing the ability of the economic system to raise living standards through increasing productivity, efficiency and employment. Economic stability is fostered by robust economic and
financial institutions and regulatory frameworks.

Following are the instruments of economic stability:
1. Monetary Policy.
2. Fiscal Policy
3. Physical policy or Direct Controls.

The central bank and the government have developed these instruments to correct the discrepancies that occur in the process of economic growth.

Monetary Policy
Monetary policy is a part of the overall economic policy of a country. It is employed by the government as an effective tool to promote economic stability and achieve certain predetermined objectives.

Monetary policy deals with the total money supply and its management in an economy. It is essentially a programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public, and the flow of credit with a view to achieving economic stability and certain predetermined macroeconomic goals.

Fiscal Policy
The term “fisc” in English language means “treasury”, and the policy related to treasury or government exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of the Government regarding public expenditure, public revenue, public debt or public borrowings. It concerns itself with the aggregate effects of government expenditure and taxation on income, production and employment. In short, it refers to the budgetary policy of the government.

Physical Policy or Direct Controls
Government interference with the forces of demand and supply in the market, and state regulation of prices of commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate to control prices, government resorts to direct control. During wars, when inflationary forces are strong, price control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising too high. In a planned economy, the objective of price control is to bring about allocation of resources in accordance with the objects of plan. Price control normally involves some control of supply or demand or both. 


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