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Chapter 36Chapter 23
Five Debates Over Macroeconomic Policy
WHAT’S NEW IN THE THIRD EDITION:
The debate on reducing the government debt has been recast to be a debate about balancing the federal
budget. There is a new
In the News
box on “Alan Greenspan versus the PC."
By the end of this chapter, students should understand:
the debate concerning whether policymakers should try to stabilize the economy.
the debate concerning whether monetary policy should be made by rule rather than by discretion.
the debate concerning whether the central bank should aim for zero inflation.
the debate concerning whether the government should balance its budget.
the debate concerning whether the tax laws should be reformed to encourage saving.
CONTEXT AND PURPOSE:
Chapter 23 is the final chapter in the text. It addresses five unresolved issues in macroeconomics, each
of which is central to current political debates. The chapter can be studied all at once, or portions of the
chapter can be studied in conjunction with prior chapters that deal with the related material.
The purpose of Chapter 23 is to provide both sides of five leading debates over macroeconomic
policy. It employs information and tools that students have accumulated in their study of this text. This
chapter may help students take a position on the issues addressed or, at least, it may help them
understand the reasoning of others who have taken a position.
Chapter 36/Five Debates Over Macroeconomic Policy
Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe
that policy can manage aggregate demand in order to offset the inherent instability. Critics of active
monetary and fiscal policy emphasize that policy affects the economy with a lag and that our ability to
forecast future economic conditions is poor. As a result, attempts to stabilize the economy can end up
Advocates of rules for monetary policy argue that discretionary policy can suffer from incompetence,
abuse of power, and time inconsistency. Critics of rules for monetary policy argue that discretionary
policy is more flexible in responding to changing economic circumstances.
Advocates of a zero-inflation target emphasize that inflation has many costs and few, if any benefits.
Moreover, the cost of eliminating inflation—depressed output and employment
is only temporary.
Even this cost can be reduced if the central bank announces a credible plan to reduce inflation,
thereby directly lowering expectations of inflation. Critics of a zero-inflation target claim that moderate
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