A carefully considered economic policy of a government may in fact shield, to a certain extent, the Canadian economy from the shocks of increasing world prices of oil and resources. There are a number of policies that could be applied to achieve a stable domestic economy. Some of these points are discussed below.
1. Government Fiscal and Monetary Policies.
Governments in market economies play critical roles in providing the economic conditions in which the marketplace of private enterprise can function most effectively.
One such role is to provide a widely accepted, stable currency that eliminates the need for cumbersome and inefficient systems of barter, and to maintain the value of that currency through policies that limit inflation (an increase in the overall level of prices of goods and services).
Historically, market economies have been periodically afflicted by periods of rapidly rising price levels, at other times with high levels of unemployment, or occasionally by periods with both high rates of inflation and unemployment such as the German hyperinflation of the 1920s and the worldwide unemployment of the 1930s known simply as the Great Depression.
Only in this century have economists and government policymakers developed a standard set of stabilization policies - known as fiscal and monetary policies - that Canadian national governments can use to try to moderate (or ideally to eliminate) such episodes.
Fiscal policies employ government spending and tax programs to stimulate the national economy or to slow it down in times of high inflation (i.e. price rises) and low unemployment that Canada is experiencing at present.
To slow down an overheated Canadian economy - one where virtually everyone is working who wants a job, but where spending and prices are rising rapidly - the government has several options to keep prices from spiralling too high.
- It can cut its own spending;
- Raise taxes; or
- both, in order to lower aggregate spending and production levels.
Monetary policy invol...