Fiscal and Monetary Policies’ Role in Economic Stabilization

Fiscal and monetary policies usually help in macroeconomic stabilization. They usually help in enhancing the growth and the welfare of citizens of a country and reducing volatility. Fiscal policy is where taxes and the spending by government is used to make the economy stable while monetary policy is where the supply of money and credit facilities are used to stabilize the economy (Eshag, 2005, p. 89). Fiscal policies will lead to increased government spending which will create more development opportunities and hence the economy will also grow. Fiscal policies also ensure that there are decreased taxes in the economy so that households can have more disposable income that will enable them to buy products. Increased purchases will lead to increased production and the economy will grow. Monitory policies on the other hand ensure that the interests are low and hence people can easily borrow money for development projects that will help in the growth of the economy. Monitory policies will generally aid in controlling the money supply and demand in the economy depending with the state of the economy. The Central Bank of Sweden has a major role in stabilizing the economy.

A Central Bank is the authority that has the responsibility of determining and implementing the monetary policy of a country (Committee, 2001, p. 124). The Risk Bank in Sweden was the first central Bank in history (Committee, 2001, p. 126). It therefore has a great significance on the stability of the Sweden economy. The major role of the central bank is the creation and implementation of monetary policy. The central bank of Sweden usually implements monitory policies for different reasons but the main reason is usually to ensure that the economy of Sweden is stable and that the nation maintains a competitive advantage in the international market (Freeman, 1999, p. 54). The Central Bank also issues currency and supervises and regulates smaller banks. Personally I think the government should intervene so as to ensure that Sweden has a steady economic growth, high levels of employment and price stability.

I conform to the use of Keynesian theories in this case. The classical theories are not recommended in this case because they do not allow much of government intervention because the economy adjusts itself in response to internal and external factors that affect it. Keynes theories on the other hand allow the government to apply fiscal and monetary policies that will help in stabilizing the economy without having much negative effects on the citizens of the country. Sweden being an almost stable economy still needs to increase its foreign trade. This is because foreign trade increases the market share of the country which in turn leads to increase in production, employment and better living standards.

Sweden will also trade its currency and this will make the monetary system very effective and strong in the international market. Increased production rates will also lead to demand of labour which will in turn lead to reduction in unemployment. The foreign exchange trade will also reduce the rate of unemployment because of the increased market share and hence increased demand of finished goods and resources such as labour which will create more jobs and reduce the rate of unemployment. The overall income level of the nation will also increase due to the income that will be received from the exports. The national income level refers to the total income received by the citizens of a country

Reference list

Committee for Economic Development., 2001. Fiscal and monetary policies: a statement on national policy. New York: Committee for Economic Development Press.

Eshag, E., 2005. Fiscal and monetary policies and problems in developing countries. UK: Cambridge University Press.

Freeman, R., 1999. Fiscal and monetary policies: their role in the adjustment process. California: Sage Publications.