The economy is affected by booms and slumps of the business cycle and it is the governments role to stabilise the peaks and troughs of economic activity.
- Boom/Recovery - occurs when output is growing, unemployment is falling and incomes are rising.
- Slump/Recession - occurs when output is falling, unemployment is rising and incomes are also falling.
There are four main objectives of the stabilisation policy:
- stable prices.
- balance of payments.
- full employment.
- steady economic growth.
Stable prices and balance of payments are closely linked as they are important for a…