There are two main tools used to control the amount of money in supply of the economy. They are monetary and fiscal policies. The pros of the policies are that they play the vital role in stabilizing the economy and foster economic development. However, there are also disadvantages of using these tools such as inflexibility in implementing them and conflict of their objectives (Clarida, Gali, " Gertler, 2000).
The fluctuations that occur during boom and recession are usually costly. For instance, during the period of recession, the factors of production are idle. This is a clear indication of wasting scarce resources. During this period the demand for goods is very low, and therefore, machinery and labor do not produce anything (Clarida et al., 2000). As a result, the introduction of stabilization policies can help significantly in eliminating this wastage.
It is not an easy task to identify an economic problem. This is because when there is a technicality, various factors may be contributors. Additionally, after the issue has been detected, taking action is a lengthy process in ensuring that the effect is under control. This means that by the time all these procedures take place, the economy would have been recovered. As a result, the policy implemented will lead to destabilization and more fluctuations (Clarida et al., 2000).
The government plays a vital role in protecting the public and controlling the market economy. They are responsible for creating policies to eliminate externalities. However, it should be noted that the factors of demand and supply control the economy, and therefore, it is not advisable for the government. As a result, the role of the government is to create rules and ensure that they are followed. Consequently, the justification for government involvement is to eliminate negative externalities and assist in the distribution of wealth.
The reasons given for less government involvement in an economy are connected with the freedom of the parties involved. The individuals might think that the government is not considering their interest, and they are taking their rights away.
Reference
Clarida, R., Gali, J., " Gertler, M. (2000). Monetary policy rules and macroeconomic stability: evidence and some theory. The Quarterly Journal of Economics, 115(1), 147-180.
