Lecture%2022 - 1 Economics 102 Lecture 22 : Policy Debates...

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Unformatted text preview: 1 Economics 102 Lecture 22 : Policy Debates LECTURE 22 POLICY DEBATES 1 Policy Debates This course has introduced you to the basic tools economists use to analyze the behavior of the economy as a whole and the impact of policies on the economy. Now, we look at both sides of five important debates over macroeconomic policy. LECTURE 22 POLICY DEBATES 2 In this lecture, look for the answers to these questions: What are the arguments on both sides of each of the following debates? Should policymakers try to stabilize the economy? Should monetary policy be made by rule or discretion? Should the central bank aim for zero inflation? Should the government balance its budget? Should the tax laws be reformed to encourage saving? 2 LECTURE 22 POLICY DEBATES 3 1. Should Policymakers Try to Stabilize the Economy? Arguments for active stabilization: Economies are . E.g., pessimism of households and firms causes AD to fall which causes a recession. LECTURE 22 POLICY DEBATES 4 Growth rate of real GDP, 1970-2006 LECTURE 22 POLICY DEBATES 5 1. Should Policymakers Try to Stabilize the Economy? Arguments for active stabilization: Economies are inherently unstable. E.g., pessimism of households causes AD to fall which causes a recession. Recessions cause economic hardship for millions of people. 3 LECTURE 22 POLICY DEBATES 6 Increased unemployment during recessions 1.67 March 1991 July 1990 1.50 November 2001 March 2001 2.11 May 1954 July 1953 4.08 November 1982 July 1981 1.68 July 1980 January 1980 3.58 March 1975 November 1973 2.01 November 1970 December 1969 1.21 February 1961 April 1960 2.27 April 1958 Aug 1957 increase in no. of unemployed persons (millions) trough peak LECTURE 22 POLICY DEBATES 7 1. Should Policymakers Try to Stabilize the Economy? Arguments for active stabilization: Economies are inherently unstable. E.g., pessimism of households causes AD to fall which causes a recession. Recessions cause economic hardship for millions of people The model of aggregate demand and supply shows how fiscal and monetary policy can respond to shocks and stabilize the economy. LECTURE 22 POLICY DEBATES 8 LRAS Y N A Role For Policy? Consider a decline in aggregate demand; perhaps caused by a stock market crash. Y decreases recession Can monetary or fiscal policy be used to reverse the effect on AD and eliminate the recession? Claim: Yes. P Y AD 1 SRAS 1 P 1 A 4 LECTURE 22 POLICY DEBATES 9 1. Should Policymakers Try to Stabilize the Economy? Arguments for active stabilization: Economies are inherently unstable. E.g., pessimism of households causes AD to fall which causes a recession. Recessions cause economic hardship for millions of people The model of aggregate demand and supply shows how fiscal and monetary policy can respond to shocks and stabilize the economy....
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

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Lecture%2022 - 1 Economics 102 Lecture 22 : Policy Debates...

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