Question

This deals with the six debates over macroeconomic policy, which include stabilization policy, government spending, monetary policy on rules versus discretion, zero inflation target, balanced budget, public debt, and reforming tax laws.

There are pros and cons of using monetary and fiscal policy tools to stabilize the economy.

a, Explain the main arguments in favor of economic stabilization during recessions. Explain why policy lags could make stabilization policies counterproductive.

b. What are the justifications given in favor of more government involvement in the market economy? What are the reasons given in favor of less government involvement in the market economy?

Answer 1

A) The 1930's Great Depression and 2007 Great Recession showed the failure of the free-market economy and government intervention necessary to stabilize the economy from the recession.The economic stabilization in the economy can be done though Expansionary fiscal and Monetary policy.

However, there need to adopt proper policies according to tot he situation of the economy while adopting the policies their limitation of these policies Administrative lag, Time lag, Recognition lag ad Operational lag which will adversely affect the working of these policies.

B) There are two views regarding the intervention of the government in the economic activities JM Keynes and their followers hold the view that government intervention must in regulating the economic activity and free economy results economic fluctuation and market itself can not correct it

Another view from the classical economics who has the opinion that under free market economy government intervention not required and interventions results in adversely affect the market.

Example government regulates the price of the goods and wages etc which will hamper the economic activity.

However, Government intervention is must nowadays in the economy in order to stabilize the economy.