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Transmission of Policy Actions to Agriculture There are numerous channels through which changes in monetary and fiscal policies can be transmitted to the farm business sector. Stabilization Policy “Economists use the term stabilization policy to refer to policy actions aimed at reducing the severity of short-run economic fluctuations. Because output and employment fluctuate around their long-run natural rates, stabilization policy dampens the business cycle by keeping output and employment as close to their natural rates as possible.” N. Gregory Mankiw, macroeconomics, fourth edition, 2000, p.249 Stabilization Policies Fiscal Policy The use of taxing and government spending for the specific purpose of stabilizing the economy. Monetary Policy Actions taken by central banks to influence the money supply or interest rates in attempts to stabilize the economy. Short-Run Effects of Policy Actions on Key Economic Variables Expansionary and contractionary applications of fiscal and monetary policy affect the farm business sector indirectly through the prices farmers receive for their products and pay for their inputs as well as through the nominal interest rates (real rate of interest plus the rate of inflation) they are charged on new loans. Short-Run Effects of Policy Actions on Key Economic Variables Expansionary Fiscal Policy Contractionary Fiscal Policy Increase Deficit Decrease Deficit Domestic Demand Raise Lower Export Demand Lower Raise Uncertain Uncertain Farm Input Prices Raise Lower Real Interest Rate Raise Lower Inflation Raise Lower Policy Action Policy Effects on: Farm Product Prices Net Impact on Price Short-Run Effects of Policy Actions on Key Economic Variables Expansionary Monetary Policy Contractionary Monetary Policy Increase MS Decrease MS Domestic Demand Raise Lower Export Demand Raise Lower Net Impact on Price Raise Lower Farm Input Prices Raise Lower Real Interest Rate Lower Raise Inflation Raise Lower Policy Action Policy Effects on: Farm Product Prices
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