In this chapter you will consider whether policymakers should try to stabilize the economy, consider whether monetary policy should be made by rule rather than by discretion, consider whether the central bank should aim for zero inflation, consider whether fiscal policymakers should reduce the government debt, consider whether the tax laws should be reformed to encourage saving. | 13 FINAL THOUGHTS 36 Five Debates Over Macroeconomic Policy Five Debates over Macroeconomic Policy 1. Should monetary and fiscal policymakers try to stabilize the economy? 2. Should monetary policy be made by rule rather than by 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? 1. Should monetary and fiscal policymakers try to stabilize the economy? 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 in order to offset this inherent instability and reduce the severity of economic fluctuations. Pro: Policymakers should try to stabilize the economy There is no reason for society to suffer through the booms and busts of the business cycle. Monetary and fiscal policy can stabilize aggregate demand and, thereby, production and employment. Con: Policymakers should not try | 13 FINAL THOUGHTS 36 Five Debates Over Macroeconomic Policy Five Debates over Macroeconomic Policy 1. Should monetary and fiscal policymakers try to stabilize the economy? 2. Should monetary policy be made by rule rather than by 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? 1. Should monetary and fiscal policymakers try to stabilize the economy? 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 in order to offset this inherent instability and reduce the severity of economic fluctuations. Pro: Policymakers should try to stabilize the economy There is no reason for society to suffer through the booms and busts of the business cycle. Monetary and fiscal policy can stabilize aggregate demand and, thereby, production and employment. 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. 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. Con: Policymakers should not try to stabilize the economy All too often policymakers can 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. 2. Should monetary policy be made by rule rather than by discretion? Pro: Monetary policy should be made by rule Discretionary monetary .
