Essay on Six Debates over Macroeconomic Policy

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Pages: 6


ISSUES | YES | NO | 1. Whether or not monetary and fiscal policymakers should try to stabilize the economy | Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put
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Because investment spending is the most volatile component of GDP over the business cycle, with a well-designed tax policy, stimulating investment is a key to ending recessions.At the same that tax cuts increase aggregate demand, they can also increase aggregate supply. When the government reduces marginal tax rates, workers keep a higher fraction of any income they earn. As a result, the unemployed have a greater incentive to search jobs, and the employed have a greater incentive to work longer hours. Increased aggregate supply, along with the increased aggregate demand, means that the production of goods and services can expand without putting upward pressure on the rate of inflation.Tax cuts have the advantage of decentralizing spending decisions, rather than relying on a centralized and highly imperfect political process. When the government tries to spend large sums of money fast, subject to political pressures, ill-conceived public projects may employ some workers, but they create little lasting value. Moreover, they will leave future generations of taxpayers with significant additional debts. In the end, the short-run benefits of additional aggregate demand from increased government spending may fail to compensate for the long-run costs. | 3. Whether or not monetary policy should be made by rule rather than by discretion | Advocates of rules for monetary policy argue that