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Business cycles can be controlled by appropriate fiscal policy and monetary policy. When the economy enters the recessionary phase, government spending should be increased (fiscal policy measure). This includes infrastructure projects, subsidies to productive sectors, etc. When infrastructure projects are undertaken, there is requirement of labor (when roads are built, construction labor is required), which leads to employment. Also supplies of cement, iron, steel, etc is required. The production of these commodities increase. People start earning wages. They earn, and so they consume more. As a result of which economy enters into expansion phase. Thanks to subsidies, cost of production goes down. The producers can offer products at lower cost.
When the economy enters expansionary phase which is above the normal growth path, monetary measures by Central banks are effective. The central bank tries to reduce the money in circulation with its open market operations and by increasing Reserve requirements.
Basically contractionary monetary or fiscal measures are used to deal with high growth and inflation, while expansionary monetary or fiscal policy for recession.
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Q: Measures to control of business cycles?
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