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12 Cards in this Set
- Front
- Back
1. Should policymakers try to stabilize the economy?
(Arguments FOR active stabilization) |
- Left on their own, economies tend to fluctuate.
- Policymakers can 'lean against the wind' (use monetary & fiscal policy to stabilize agg demand, output, and employment) - A more stable economy benefits everyone |
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1. Should policymakers try to stabilize the economy?
(Arguments AGAINST active stabilization) |
- Monetary & Fiscal Policy work with long lags, so policy must act in advance of economic changes.
- But the shocks that cause fluctuations are unpredictable, and forecasting is highly imprecise. - If policy takes effect too late, it will worsen fluctuations. - So, leave the economy to its own devices. |
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2. Should the government fight recessions with spending hikes or tax cuts?
(Arguments for fighting recessions with SPENDING) |
- Each $ of gov't spending adds directly to agg demand, but only part of each $ of a tax cut goes to AD because consumers save part of it.
- Since most states must keep balanced budgets, federal spending can prevent laying off of public workers, saving jobs. |
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2. Should the government fight recessions with spending hikes or tax cuts?
(Arguments for fighting recessions with TAX CUTS) |
- Tax cuts increase households' disposable income and therefore increase consumption spending.
- Tax cuts can increase aggregate demand with incentives (like the investment tax credit) - Tax cuts can increase aggregate supply by increasing the incentive to work and produce goods and services. - Rapid spending increases may be wasteful ('bridges to nowhere') and will require future tax increases. |
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3. Should monetary policy be made by rule or discretion?
(Arguments AGAINST discretion) |
- Allowing central bank's discretion could do great harm if they are incompetent.
- Discretion allows the possibility of abuse (using monetary policy to affect election outcomes). - Central banks who promise price stability may renege if a recession occurs (time-inconsistency: the discrepancy between actual policy and announced policy) |
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3. Should monetary policy be made by rule or discretion?
(Arguments FOR discretion) |
- Discretion allows flexibility to react to unforeseen events.
- Political business cycles and time-inconsistency are theoretical possibilities but not that important in practice. - It is difficult to specify rules precisely and to determine what the best rule would be. |
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4. Should the central bank aim for zero inflation?
(Arguments FOR a zero inflation target) |
- The costs of inflation can be substantial even for low inflation.
- Achieving zero inflation would have temporary costs (higher unemployment) but permanent benefits. --> These costs could be reduced if the commitment to zero inflation is credible (reduces the expected inflation rate) |
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4. Should the central bank aim for zero inflation?
(Arguments AGAINST a zero inflation target) |
- The benefits of moving from moderate to zero inflation are small, but costs are large:
-Est: must sacrifice 5% of a year's GDP for each 1% reduction in inflation -A disinflation would leave permanent scars: investment falls, lowering the future capital stock -Workers' skill diminish while unemployed - Some of inflation's costs could be reduced through more widespread indexation. |
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5. Should the government balance its budget?
(Arguments FOR balancing the budget) |
- Gov't debt places a burden on future generations.
- Budget deficits crowd out investment, reducing growth and future living standards. - While deficits may be justified during recessions or wars, the surging peacetime debt of recent decades is unsustainable and detrimental. |
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5. Should the government balance its budget?
(Arguments AGAINST balancing the budget) |
- The burden of gov't debt is exaggerated; it's only a tiny % of a person's lifetime income.
- Cutting the deficit could do more harm than good: --> Cutting education would reduce future human capital accumulation and future living standards. --> Raising taxes reduces incentives to work and save - Focusing on the deficit diverts attention from other programs that redistribute income across generations (e.g., Social Security) - Debt/Income ratio more relevant than debt itself |
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6. Should the tax laws be reformed to encourage saving?
(Arguments FOR tax reform to encourage saving) |
- 'A nation's standard of living depends on its ability to produce goods and services'
- Higher saving provides more funds for capital accumulation, which increases productivity and living standards. - 'People respond to incentives' - The current US tax system discourages saving...better to replace income tax with consumption tax to increase the incentive to save. |
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6. Should the tax laws be reformed to encourage saving?
(Arguments AGAINST tax reform to encourage saving) |
- Such tax reform would mainly benefit the wealthy, who need tax relief the least.
- Estimates of the interest-rate elasticity of saving are low, so tax incentives may not increase saving much. - Reducing taxes on capital income may increase the gov't budget deficit, negating the benefits of higher private saving - Better: increase national saving directly by reducing the budget deficit. |