Chapter 36 Six Debates over Macroeconomic Policy

7
Debate #2
2. Should the government fight recessions with spending hikes rather than tax cuts? • President George W. Bush, 2001
– Economy was slipping into a recession – Cutting tax rates
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8
Debate #2
Pro: the government should fight recessions with spending hikes • Fundamental problem during recessions
– Inadequate aggregate demand
• Key to ending recessions
– Restore aggregate demand to a level consistent with full employment
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2
Debate #1
Pro: policymakers should try to stabilize the economy • When aggregate demand is too small
– High unemployment – Policymakers
• Boost government spending • Cut taxes • Expand the money supply
9
Debate #2
Pro: the government should fight recessions with spending hikes • Monetary policy
– First line of defense - economic downturns – Increasing the money supply
– More stable economy, benefits everyone
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for c: policymakers should not try to stabilize the economy • Monetary and fiscal policy
– Do not affect the economy immediately – Work with a long lag
3
Debate #1
Pro: policymakers should try to stabilize the economy • When aggregate demand is excessive
– High inflation – Policymakers
• Cut government spending • Raise taxes • Reduce the money supply
1
Debate #1
1. Should monetary and fiscal policymakers try to stabilize the economy? • Changes in aggregate demand and aggregate supply
– Short-run fluctuations in production and employment
• Reduces interest rates • Reduce the cost of borrowing • Increased spending on investment • Increased aggregate demand
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– Increased government spending
• Adds directly to aggregate demand
• Monetary policy – about 6 months • Fiscal policy – long political process, it can
take years
– Economic forecasting is highly imprecise
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• Monetary and fiscal policy
– Can shift aggregate demand – Influence these fluctuations
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
36
Six Debates over Macroeconomic Policy
PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
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• President Barack Obama, 2009
– Economy –worst recession in many decades – Stimulus package – tax reductions and substantial increases in government spending
6
Debate #1
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5
Debate #1
Con: policymakers should not try to stabilize the economy • Policymakers trying to stabilize the economy
– Can do just the opposite – Economic conditions can easily change
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10
Debate #2
Pro: the government should fight recessions with spending hikes • Fiscal policy
– Cutting taxes
• Increased household disposable income
• Increase spending on consumption