1、Six Debates over Macroeconomic PolicyPremium PowerPoint Slides by Ron Cronovich 2012 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-prot
2、ected website for classroom use.Principles ofSixth Edition 2012 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 cla
3、ssroom use.1 1In this chapter,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 fiscal policy fight recessions with spending hikes or tax cuts?Should monetary policy be made by rule or
4、 discretion?Should the central bank aim for zero inflation?Should the government balance its budget?Should the tax laws be reformed to encourage saving?2012 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 distr
5、ibuted with a certain product or service or otherwise on a password-protected website for classroom use.2 2Introduction This course has introduced you to the tools economists use to analyze the behavior of the economy as a whole and the impact of policies on the economy.This final chapter presents b
6、oth sides in six classic debates over macroeconomic policy.2012 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 cla
7、ssroom use.3 31.Should Policymakers Try to Stabilize the Economy?Arguments for active stabilization:Left on their own,economies tend to fluctuate.E.g.,pessimism of households and firms causes a fall in agg demand,which causes a recession.Policymakers can“lean against the wind,”i.e.use monetary&fisca
8、l policy to stabilize agg demand,output,and employment.A more stable economy benefits everyone.2012 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
9、a password-protected website for classroom use.4 41.Should Policymakers Try to Stabilize the Economy?Arguments against active stabilization:Monetary&fiscal policy work with long lags,so policy must act in advance of economic changes.But the shocks that cause fluctuations are unpredictable,and foreca
10、sting is highly imprecise.If policy takes effect too late,it will worsen fluctuations.So,leave economy to its own devices.1 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?2012
11、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.1 1 If wages,prices,and expectations adjust slowly,it
12、 will take longer for the economy to return to its natural rates of output and employment.In that case,theres a better chance that expansionary policy will act in time to alleviate the recession,rather than push the economy into an inflationary boom.2012 Cengage Learning.All Rights Reserved.May not
13、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.2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in p
14、art,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.7 72.Should the Government Fight Recessions with Spending Hikes or Tax Cuts?Arguments for fighting recessions with spending:Each$of govt spending
15、adds directly to aggregate demand,but only part of each$of a tax cut does because consumers save part of it.Since most states must keep balanced budgets,federal spending given to states can prevent states from laying off public workers,saving jobs.2012 Cengage Learning.All Rights Reserved.May not be
16、 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.8 82.Should the Government Fight Recessions with Spending Hikes or Tax Cuts?Arguments for fighting r
17、ecessions with tax cuts:Tax cuts increase households disposable income and therefore increase consumption spending.Tax cuts can increase aggregate demand with incentiveslike the investment tax credit.Tax cuts can increase aggregate supply by increasing the incentive to work and produce g&s.Rapid spe
18、nding increases may be wasteful(“bridges to nowhere”)and will require future tax increases.2012 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 pa
19、ssword-protected website for classroom use.9 93.Should Monetary Policy Be Made by Rule or Discretion?The Federal Reserve has almost complete discretion over monetary policy.Some argue that the Fed should be forced to follow a rule,such as constant money growth rate inflation targeting:increase money
20、 growth rate if inflation is below target decrease money growth rate if inflation is above target 2012 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
21、on a password-protected website for classroom use.10103.Should Monetary Policy Be Made by Rule or Discretion?Arguments against discretion:Allowing central bankers discretion could do great harm if they are incompetent.Discretion allows the possibility of abuse.E.g.,using monetary policy to affect el
22、ection outcomes,causing fluctuations called“the political business cycle.”Central bankers who promise price stability may renege if a recession occurs.Time-inconsistency:the discrepancy between actual policy and announced policy 2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or
23、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.11113.Should Monetary Policy Be Made by Rule or Discretion?Arguments for discretion:Discretion allows flexibility to re
24、act to unforeseen events.Political business cycles and time-inconsistency are theoretical possibilities but not that important in practice.It is difficult to specify rules precisely and to determine what the best rule would be.2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or du
25、plicated,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.12124.Should the Central Bank Aim for Zero Inflation?Recall two of the Ten Principles of Economics from Chapter 1:Prices
26、rise when the govt prints too much money.Society faces a short-run tradeoff between inflation and unemployment.How much inflation should the central bank accept?Is zero the right target?2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for u
27、se as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.13134.Should the Central Bank Aim for Zero Inflation?Arguments for a zero inflation target:The costs of inflation(shoeleather,menu,etc.)can be substantial even fo
28、r low inflation.Achieving zero inflation would have temporary costs(higher unemployment)but permanent benefits.And these costs could be reduced if the commitment to zero inflation is credible(reduces the expected inflation rate).2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or
29、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.14144.Should the Central Bank Aim for Zero Inflation?Arguments against a zero inflation target:The benefits of moving f
30、rom moderate to zero inflation are small,but the costs are large:Estimates:must sacrifice 5%of a years GDP for each 1%reduction in inflation A disinflation would leave permanent scars:Investment falls,lowering the future capital stock Workers skills diminish while unemployed Some of inflations costs
31、 could be reduced through more widespread indexation.2 2Suppose a structural change reduces the demand for university administrators,lowering their equilibrium real wage by 3%.A.If the actual real wage paid to university administrators remains constant,what would be the consequences?B.Would it be ea
32、sier to achieve the 3%real wage reduction if the inflation rate is 0%or if it is 4%?Why?2012 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 passw
33、ord-protected website for classroom use.2 2A.If the actual real wage paid to university administrators remains constant,what would be the consequences?Whenever the actual real wage exceeds the equilibrium real wage,there is a surplus of labor,which represents wasted resources.A fall in the wage woul
34、d alleviate the surplus:it would encourage some administrators to switch to university teaching or private sector employment it would increase the quantity of administrators demanded 2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use
35、as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2 2B.Would it be easier to achieve the 3%real wage reduction if the inflation rate is 0%or if it is 4%?Why?To restore labor market equilibrium under 0%inflation,admi
36、nistrators would have to accept a 3%nominal wage cut.Under 4%inflation,they would have to accept a 1%nominal wage increase.The second scenario is more likely,as many people suffer from“money illusion”and focus on nominal variables rather than real ones.2012 Cengage Learning.All Rights Reserved.May n
37、ot 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.2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or i
38、n 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.18185.Should the Government Balance Its Budget?Arguments for balancing the budget:Govt debt places a burden on future generations.Budget defici
39、ts crowd out investment,reducing growth and future living standards.While deficits may be justified during recessions or wars,the surging peacetime debt of recent decades is unsustainable and detrimental.2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in
40、 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.19195.Should the Government Balance Its Budget?Arguments against balancing the budget:The burden of the govts debt is exaggerated;its only a tin
41、y%of a persons lifetime income.Cutting the deficit could do more harm than good:Cutting education would reduce human capital accumulation and future living standards Raising taxes reduces incentives to work and save Focusing on the deficit diverts attention from other programs that redistribute inco
42、me across generations,such as Social Security.Debt/income ratio more relevant than debt itself 2012 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
43、a password-protected website for classroom use.20206.Should the Tax Laws Be Reformed toEncourage Saving?Arguments for tax reform to encourage saving:One of the Ten Principles of Economics:A nations standard of living depends on its ability to produce g&s.Higher saving provides more funds for capital
44、 accumulation,which increases productivity and living standards.2012 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 fo
45、r classroom use.21216.Should the Tax Laws Be Reformed toEncourage Saving?Arguments for tax reform to encourage saving:Another of the Ten Principles of Economics:People respond to incentives.The current U.S.tax system discourages saving:High marginal tax rates reduce return on saving Some saving is t
46、axed twice(as corporate income and again as personal income)High tax rates on bequests(up to 55%!)Better:replace income tax with a consumption tax to increase the incentive to save3 3 Suppose the income tax were replaced with a consumption tax,and the tax rate was chosen carefully to ensure that the
47、 average persons tax burden remains unchanged.Who would benefit?Who would be worse off?2012 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 passwo
48、rd-protected website for classroom use.3 3 People with higher incomes save a bigger percentage of their incomes,so would benefit most from this change.People with low incomes use most or all of their incomes for consumption and would be worse off.(This is why most consumption tax proposals include e
49、xemptions for necessities,like groceries,which comprise a larger share of the budgets of low-income persons.)2012 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
50、 otherwise on a password-protected website for classroom use.2012 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
