Macro%20Chapter%2017A(1)

Macro%20Chapter%2017A(1) - Chapter 17 Five Debates Over...

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1 Chapter 17 Five Debates Over Macroeconomic Policy Five Debates Over Macroeconomic Policy
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2 Issues: What are the arguments on both sides of each of the following debates? 1. Should policymakers try to stabilize the economy? 2. Should monetary policy be made by rule or discretion? 3. Should the central bank aim for zero inflation? 4. Should the government balance its budget? 5. Should the tax laws be reformed to encourage saving?
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3 1. Should monetary and fiscal policymakers try to stabilize the economy?
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4 Pro:  Policymakers should try to stabilize  the economy The economy is inherently unstable, and left on its own will fluctuate. Policy can manage aggregate demand to offset this instability and reduce the severity of economic fluctuations. Society should not have to suffer through the booms and busts of the business cycle. Monetary and fiscal policy can stabilize aggregate demand and, thereby, production and employment.
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5 Con: Policymakers should not try to stabilize  the economy Monetary policy affects the economy with long and unpredictable lags between the need to act and the time that it takes for these policies to work. Many studies indicate that changes in monetary policy have little effect on aggregate demand until about six months after the change is made.
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6 Con: Policymakers should not try to  stabilize the economy Fiscal policy works with a lag because of the long political process that governs changes in spending and taxes. It can take years to propose, pass, and implement a major change in fiscal policy.
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7 Con: Policymakers should not try to  stabilize the economy Too often policymakers inadvertently exacerbate rather than mitigate the magnitude of economic fluctuations. It might be desirable if policy makers could eliminate all economic fluctuations, but this is not a realistic goal.
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8 Discussion 1 Would you be more likely to support active stabilization policy if wages, prices, and expectations adjust quickly in response to economic changes, or if they adjust slowly?
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9 1. Should monetary policy be made by an independent central bank?
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10 Pro: Monetary policy should be made by an  independent central bank
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Macro%20Chapter%2017A(1) - Chapter 17 Five Debates Over...

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