Ten Principles of Economics - Part 79. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 807 I QUICK QUIZ Give three examples of how our society discourages saving. What are the drawbacks of eliminating these disincentives CONCLUSION This chapter has considered five debates over macroeconomic policy. For each it began with a controversial proposition and then offered the arguments pro and con. If you find it hard to choose a side in these debates you may find some comfort in the fact that you are not alone. The study of economics does not always make it easy to choose among alternative policies. Indeed by clarifying the inevitable tradeoffs that policymakers face it can make the choice more difficult. Difficult choices however have no right to seem easy. When you hear politicians or commentators proposing something that sounds too good to be true it probably is. If they sound like they are offering you a free lunch you should look for the hidden price tag. Few if any policies come with benefits but no costs. By helping you see through the fog of rhetoric so common in political discourse the study of economics should make you a better participant in our national debates. Summary Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand 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 being destabilizing. 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 .
