Measures To Control Business Cycle are discussed In this Article.Now it is believed that one of the main responsibilities of the government is to formulate policies and take steps for consistent economic development and control of fluctuations in business. The government takes fiscal and monetary measures to achieve desirable changes in the economic activities on aggregate level. When fiscal and monetary policies are used to control business cycle theses are then called counter cyclical policies.

1 Fiscal Policy

Fiscal policy refers to all the decisions and measures of the government to change its taxes and expenditures.

During the boom and inflationary situation, government may increase its taxes and reduce public expenditures; this creates budget surplus and control inflation. On the other hand during recession government cuts down its taxes and increases its expenditures on public works. It creates deficit in budget which help government to eliminate recession. When there is prosperity without inflation, government usually keeps its budget balanced which causes no inflation o& inflation in the economy.

Modern economists think that fiscal policy is the most important and effective for controlling trade cycles in the economy. This policy is only successful if it is adopted rationally and according to the needs of the economy.

 2 Monetary Policies

 Monetary policy refers to all the measure of central bank to change the supply of money. The excess supply of money is a cause of inflation in the economy where as insufficient supply of money cause deflation. A care full management of credit and interest is very helpful ‘in controlling trade cycle in the economy. During the period of prosperity and inflation, central bank takes measures to reduce the supply of money. On the contrary in depression increase in supply of money yields desired results.

Monetary policy is very effective in controlling inflation, because it can help in reducing credit advanced by commercial banks. During the period of recession its effectiveness is controversial. During depression consumer and business become more pessimistic and their expectations about future are disappointing, therefore they are not willing to borrow from banks.

You Must  know different measures to control Business Cycle In Order To Understand The Trade cycle System.

3 International Measures

As the business cycles are of international in nature. Whenever a business cycle appears in a country, due to its trade relations with other countries, these usually spread to other countries. Therefore it is necessary to take measures on international level to control trade cycles. For example if there is depression in USA or Japan, the economy of Pakistan and other countries is bound to suffer due to heavy economic reliance on these two countries. In these circumstances all the countries should take corrective measures for the revival of the big economies. This may be done by increasing imports from these countries. Other measure may include reconsidering the rules and regulation of trade and making them favorable with these countries.

4 Economic Reforms

The developing economies like Pakistan usually face the situation of recession. One major cause of such a recessionary situation is back ward structure of the economy. In this situation government should take bold step to introduce reforms in the economy .These reforms may include

1. Changes in the taxation system
2. Agriculture reforms

• Policies favorable for industrial growth.

1. Removal of Administrative inefficiencies, etc.

 5 Planning

Market forces of demand and supply have failed to best allocate the scarce resources. Due to the wastage of already scare resources the business fluctuations have become the order of the day. In this situation it is desirable for the government to interfere in economic decision making. Appropriate planning may help a country to get out of depression or main the situation of prosperity.

6 Investment Friendly Environments

When a country becomes politically unstable it becomes very difficult for it to maintain prosperity. In this situation investors stop new investment due to uncertainty. The journey towards recession sets in fast. In this situation it is very important to build up their confidence and make investment friendly environment in the country. This will help to stop recession and achieve prosperity. Thus political stability is an important factor of economic stability,

Understanding the Business Cycle: Phases and Policy Measures

The business cycle is a fundamental concept in economics describing the fluctuations in economic activity over time. These ups and downs affect employment, production, and income levels in any economy.

In this blog, we’ll explore:

• The 4 phases of the business cycle with a simple diagram

• The monetary and fiscal policy tools used to control and stabilize these cycles

---

 The 4 Phases of the Business Cycle

The business cycle consists of four key phases that repeat over time:

1. Expansion (Recovery)

• Economic activity increases

• Rising GDP, employment, and income

• Consumer confidence and spending grow

• Businesses invest more

2. Peak

• The economy hits its highest point

• Maximum output and employment

• Inflationary pressures may begin

• Growth slows down, signaling a turning point

3. Contraction (Recession)

• Economic activity declines

• Falling GDP and rising unemployment

• Consumer and business confidence drop

• Production and investments decrease

4. Trough

• Economy reaches its lowest point

• High unemployment and idle capacity

• Signals the end of recession

• Sets the stage for recovery and expansion

---

Simple Diagram of the Business Cycle

The curve moves from Expansion to Peak, then declines through Contraction to the Trough, before rising again.

---

 Policy Measures to Control the Business Cycle

Governments and central banks use monetary and fiscal policies to smooth out business cycle fluctuations, aiming for stable growth and low unemployment.

Monetary Policy

Conducted by Central Banks (e.g., Federal Reserve, RBI)

• Expansionary Monetary Policy: Used during recession/trough

  • Lower interest rates

  • Increase money supply

  • Encourage borrowing and investment

• Contractionary Monetary Policy: Used during peak/inflation

  • Raise interest rates

  • Reduce money supply

  • Control inflation and overheating

Fiscal Policy

Conducted by the Government

• Expansionary Fiscal Policy:

  • Increase government spending

  • Decrease taxes

  • Stimulate demand and job creation

• Contractionary Fiscal Policy:

  • Decrease government spending

  • Increase taxes

  • Slow down inflation and excessive growth

---

 Summary