CH20: Five debates over macroeconomic policy

Question 1

Should MP and FP makers try to stabilise the economy?

Answer 1

Should:
+ Stabilise AD, and thus production and employment.
+ Offset instability of economy.
Should not:
- MP and FP have lags for when they work.
- Can often exacerbate rather than eliminate problems.

Question 2

Should MP be made by rule rather than discretion?

Answer 2

Should:
+ Discretionary MP subject to incompetence and abuse of power.
+ Discrepancy between what policy makers say and what they actually do - time inconsistency of policy.
Should not:
- Flexibility of policies.

Question 3

Should central bank aim for zero inflation?

Answer 3

Should:
+ reduces all costs to society of inflation, and inflation provides no benefits.
Should not:
- Likely impossible, and comes at high output, unemployment and social costs to get there.
- Many costs of inflation can be reduced without reducing inflation.

Question 4

Should FP makers reduce the govt debt?

Answer 4

Should:
+ Budget deficits provide burden on future generations by increasing their taxes and lowering their incomes.
+ Deficits = less national saving, capital stock falls, productivity and growth falls.
Should not:
- Transfer to future justifiable, as future will receive most of benefits from spending which caused the deficit.
- Population growth and tech progress means ability to pay in the future will increase anyway.

Question 5

Should tax laws be reformed to encourage saving?

Answer 5

Should:
+ Saving key determinant of long-term economic prosperity - leads to higher future investment + growth.
Should not:
- Tax laws encouraging saving benefit the rich more, as they are able to save higher amounts of money.