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cobweb theorem analyses the time-path of price and output in an agricultural market, and establishes conditions under which price oscillations will diminish through time as price converges to its equilibrium. Clearly, since time must enter explicitly, stability analysis forms an important part of economic dynamics.
Stabilization policy. The name given to the measures which governments take to reduce the extent of fluctuations in economic activity. Left to themselves, free market capitalist economies (O capitalism) tend to exhibit over time cyclical fluctuations in national income and employment.
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The determinants of the timing and amplitude of these fluctuations are analysed in that part of economics known as the theory of the trade cycle. As the economy approaches the peak' of a cycle, there is rapid wage and price inflation, imports rise relative to exports, and balance-of-payments deficits occur. On the other hand, in the trough' of a cycle, unemployment is high and business profits are down. Hence, the aim of stabilization policy is to restrain the economy when it is nearing the peak of the cycle, and to stimulate the economy when it approaches the trough. Because of the alternation between restraint and stimulation which the policy implies, it has earned the name stop-go'.
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