Download QUESTIONS FOR DISCUSSION

QUESTIONS FOR DISCUSSION
1.
What policies would Keynesian, Monetarists, and Supply-siders advocate for
a.
Restraining inflation?
b.
Reducing unemployment?
Keynesians
a.
To restrain inflation, Keynesian’s recommend policy levers that decrease (shift to
the left) AD. Thus, they would argue for increases in taxes, decreases in
government spending, and a decrease in the money supply (caused by buying
government bonds in open market operations, increasing the discount rate, or
increasing the reserve requirements).
b.
To reduce unemployment, Keynesian’s recommend policy levers that increase
(shift to the right) AD. Thus, they would argue for decreases in taxes, increases
in government spending, and an increase in the money supply (caused by selling
government bonds in open market operations, decreasing the discount rate, or
decreasing the reserve requirements).
Monetarists see no point in discretionary policies since they believe the AS curve is
vertical at the ‘natural’ rate of unemployment. Thus, their prescription to inflation and
unemployment is ‘patience’. There should be no attempt to fine-tune the economy. They
would also argue for a steady change in the money supply at a rate consistent with the
desired long-term growth rate of the economy.
Supply-siders
a.
To restrain inflation, supply-siders argue policy levers should be used to shift the
location and shape of the AS curve. In this case, they would argue for a shift of
AS to the right by cutting taxes and regulations and also lowering import
barriers to allow cheaper foreign goods into the markets.
b.
To reduce unemployment, supply-siders argue again that policy levels should be
used to shift the location and shape of the AS curve. In this case, they would
argue for cuts in marginal tax rates on investment and labor. They would also
look for ways to reduce government regulation to reduce the cost of producing
goods and services.
2.
Should economic policies respond immediately to any changes in reported
unemployment or inflation rates? When should a response be undertaken?
The problem is to differentiate between a statistical "blip" and a trend. Finetuning advocates will be in favor of responding relatively quickly. Monetarists
will advocate doing nothing. Supply-siders might propose waiting.
3.
Suppose that it is an election year and that aggregate demand is growing so fast that it
threatens to set off an inflationary movement. Why might Congress and the president
hesitate to cut back on government spending or raise taxes, as economic theory suggests
is appropriate?
Political considerations, unfortunately, can and do outweigh economic
fundamentals on occasion. Tax hikes and reduced government spending are not
usually well received by consumers/voters. The goal for politicians may be to get
reelected and then deal with economic problems.
4.
In his fiscal 1997 budget, President Clinton proposed decreases in defense spending to
help reduce the budget deficit. Should military spending be subject to macroeconomic
constraints? What programs should be expanded or contracted to bring about needed
changes in the budget? Is it feasible?
Again, the role of political issues is highlighted. From a strictly economic
viewpoint, aggregate spending should be subject to macroeconomic constraints.
Macro theory provides no guidelines on which spending should be targeted.
5.
What is the “amazing phenomenon” referred to in the Headline on p. 357?
Tax revenue fell for three straight years for the first time since the Great
Depression.
6.
Are we better off or worse off because of the discretionary macro policies of the last two
years? How could you tell?
Answers here should start by identifying discretionary policy actions that have
taken place during the last two years. Next they should look at changes in the
unemployment rate, Real GDP, and inflation.
7.
Suppose that the economy is slumping into recession and needs a fiscal-policy boost.
Voters, however, are opposed to larger federal deficits. What should policy makers do?
The federal government could initiate a balanced budget increase in spending,
i.e. G = T . This kind of spending change has a positive spending multiplier of
1 and would stimulate the economy. The government could also simply cut taxes
in the hope that voters’ satisfaction with lower taxes will outweigh their more
abstract concern with budget deficits. The government might also try to raise
expectations and confidence with "rosy" economic projections. Another thing
they could do is to use monetary policy to reduce interest rates and hope that
such a move will encourage more investment spending. It will also serve to
reduce the size of government's expenditures on interest.
8.
Outline a macro policy package for attaining full employment and price stability in the
next 12 months. What obstacles, if any, will impede attainment of these goals?
Answers will depend on the state of the economy when this question is assigned.
The biggest obstacle is going to be the policy lags. It is relatively easy to
prescribe a change in government spending or taxes or both, but it is more
difficult – and potentially time consuming – for Congress and the President to
agree on what government spending or taxes to change and by how much. Even
after that is done, it takes time for the policy to actually have an impact on the
economy. Attaining these goals in 12 months is rather ambitious.
9.
What should the Fed have done in late 2000 when consumer confidence started falling
(See Headline, p. 359)? Would that entail fine-tuning?
In cases where a drop in consumer confidence results in a decrease in AD
resulting in increased unemployment, the Fed should decrease interest rates
using its monetary tools (buying government securities through open market
operations, decreasing the discount rate, or decreasing the reserve requirement).
10.
Democrats labeled President Bush’s 2001 tax-cut plan as a “giveaway to the rich”
because it gave the richest taxpayers the largest tax cuts. Corporate America also
complained that there was no business tax cuts in the Bush plan. How would such
criticism affect the lag time for fiscal policy?
The lag time for fiscal policy consists of three components: the time it takes to
recognize a problem exists, the time it takes to debate what to do about the
problem, and then the time it takes for the policy to work its way fully through the
economy. In this case, the criticisms listed in the question affect the time it takes
to debate what to do about the problem. The more controversial any fiscal policy
is, the more Congress will debate the proposed policy change.