Answer to Question #80517 in Macroeconomics for Gem

Question

Why monetary and fiscal policy are known as automatic stabilization measures in an economy

Answer 1

Before answering this question, it is necessary to determine what exactly we mean by "stabilization in an economy.
Stabilization of the economy is a process by which sustainable growth of production and employment, corresponding to the natural growth of the population, as well as the practical invariance of prices, is understood. When one or several of these components are violated for one reason or another (a sharp fall or, on the contrary, an excessively accelerated growth in production, an increase in unemployment or inflation), there is a need for economic stabilization.
As you can see in the definition, trade-money relations are the main indicator of the strength of the economy. Thus, the monetary (fiscal too) policy of the state can influence the economy by introducing new tariffs and duties on spheres that are rapidly developing. Or reduce taxes in areas with low activity. Thus, the state can stimulate growth or recession, depending on the direction of the current state strategy.
In addition, the state can withdraw money from circulation or add, reducing or increasing the level of inflation