Question

What are six important debates over macroeconomic policy?

Answer 1

The six important debates over macroeconomic policy are

1. Should policymakers attempt to stabilize the economy?

Pros and cons:

Everyone gets benefitted when economy is more stable, so monetary and fiscal policy should be used by the policymakers to stabilize economy.

Things can be worse if policy does not come before changes so as to work properly and in that case economy should be left to readjust itself.

1. Should government combat recessions by the way of spending hikes or tax cuts?

Pros and cons:

Each dollar spent by the government directly increases AD, while only a part of it is taxed and goes to AD due to the fact that consumers save part of it and it is fed dollar given to states which ensures workers keep public jobs.

Increase AD and consequently increase AS due to tax cuts, thus hasty spending increase may be uneconomical and that necessitates future tax increases.

1. Should monetary policy be prepared by law or discretion?

Pros and cons:

If monetary policy is made by discretion power, it can fell into the hands of bad central bankers which can lead to potential misuse. Ultimately there will be rise in interest rates and there would be time-inconsistency

In case of unforeseen events discretion leads to flexibility to react.

1. Should the Central Bank target for zero inflation?

Pros and cons:

Costs of inflation would lead to like high unemployment but they will be temporary costs but it can lead to long term success

Moving from moderate to zero inflation will costs too much which means for every 1% of drop in inflation GDP will lose 5% GDP. And although more widespread indexation can be used to reduce some of inflation costs

1. Should the Government stabilize its budget?

Pros and cons:

If government does not balance its budget, there will a burden on future generations due to debt; investment will be crowded out and growth and future living standards will be reduced.

On the other hand, trimming deficit can decrease education, human capital and living standards, while as the debt-income ratio will be higher than real debt

1. Should the tax laws be improved to boost saving?

Pros and cons:

Goods and services production has a direct impact on standard of living. If there is more saving or capital accumulation there will be more productivity and thus better living standards.

Saving are discouraged by tax system as it increases income tax (double taxation, high rates) though people respond to incentives. And consumption tax increases the incentive to save.