20121222 mankiw economics chapter36

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Text of 20121222 mankiw economics chapter36

  • 1. Principles of Economics Chap36 Six debates over Macroeconomic Policy
  • 2. What we have learned in macroeconomics 2 Chap 25 Chap 26 Chap 27 Chap 28 Chap 29 Chap 30 The level and growth of productivity and real GDP How the financial system works and How the real interest rate adjusts to balance saving and investment Why there is always some unemployment in the economy The monetary system and how changes in the money supply affect the price level,the inflation rate, and the nominal interest rate Chap 31 Chap 32 Extension of this analysis to open economies to explain the trade balance and the exchange rate. GDP Financial system Unemployment Monetary system Open Economy Chapter Key words Contents Chap 33 .Discussing some of the important facts about short run fluctuations in economic activity and introducing a basic model to explain those fluctuations. Aggregate demand and aggregate supply Chap 34 How monetary policy influences aggregate demand. How fiscal policy influences aggregate demand Aggregate demand and aggregate supply Chap 35 rela>onship between ina>on and unemployment The short-run trade o Between Ina>on and Unemployment
  • 3. Proposi>on (and percentage of economists who agree) 1. A ceiling on rents reduces the quan>ty and quality of housing available.(93%) 2. Taris and important quotas usually reduce general economic welfare.(93%) 3. Flexible and oa>ng exchange rates oer an eec>ve interna>onal monetary arrangement.(90%) 4. Fiscal policy(e.g., tax cut and/or government expenditure increase) has a signicant s>mula>ve impact on a less than fully employed economy. 5. The United States should not restrict employers from outsourcing work to foreign countries.(90%) 6. Economic growing in developed countries like that United States leads to greater levels of well-being.(88%) 7. The United States should eliminate agricultural subsidies.(85%) 8. An appropriately designed scal policy can increase the long-run rate of capital forma>on.(85%) 9. Local and state governments should eliminate subsidies to professional sports franchises.(85%) 10.If the federal budget is to balanced, it should be done over the business cycle rather than yearly.(88%)
  • 4. Ten Principles of Economics .How People Make Decisions. 1:People Face Trade-offs. 2:The Cost of Something Is What You Give Up to Get It. 3:Rational People Think at the Margin. 4:People Respond to Incentives. .How People Interact. 5:Trade Can Make Everyone Better Off. 6:Markets Are Usually a Goodway to Organize Economic Activity. 7:Governments Can Sometimes Improve Market Outcomes. .How the Economy as a Whole Works 8:A Country's Standard of Living Depends on its Ability to Produce Goods and Services. 9:Prices Rise When the Government Prints Too Much Money. 10:Society Faces a Short-Run Trade-off between Inflation and Unemployment. 4
  • 5. Six debates over Macroeconomic Policy
  • 6. Six debates over Macroeconomic Policy 1. Should monetary and scal policymakers try to stabilize the economy? 2. Should the government ght recessions with spending hikes rather than tax cuts? 3. Should monetary policy be made by rule rather than by discre>on? 4. Should the central bank aim for zero ina>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
  • 7. Six debates over Macroeconomic Policy 1. Should monetary and scal policymakers try to stabilize the economy? 2. Should the government ght recessions with spending hikes rather than tax cuts? 3. Should monetary policy be made by rule rather than by discre>on? 4. Should the central bank aim for zero ina>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
  • 8. Pro: Policymakers should try to stabilize the economy The development of macroeconomic theory has shown policymakers how to reduce the severity of economic uctua>ons. When aggregate demand demand is inadequate to ensure full employment, policymaker should boost government spending, cut taxes, and expand the money supply. Such policy ac>ons put macroeconomic theory to its best use by leading to a more stable economy, which benets everyone.
  • 9. Con: Policymakers should not try to stabilize the economy Monetary policy and scal policy do not aect the economy immediately but instead work with a long lag. Too o_en, policymakers trying to stabilize the economy do just the opposite. The Great Depression of 1930s, Lehman shock in 2008 etc Economic policymakers should refrain from intervening o_en with monetary and scal policy and be content if they do no harm.
  • 10. Six debates over Macroeconomic Policy 1. Should monetary and scal policymakers try to stabilize the economy? 2. Should the government ght recessions with spending hikes rather than tax cuts? 3. Should monetary policy be made by rule rather than by discre>on? 4. Should the central bank aim for zero ina>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
  • 11. Pro: The government should ght recessions with spending hikes Barack Hussein Obama Franklin Delano Roosevelt
  • 12. Pro: The government should ght recessions with spending hikes Economists have understood that the fundamental problem during recessions is inadequate aggregate demand. Monetary policy is the rst line of defense against economic downturns. Fiscal policy is par>cularly useful when the tools of monetary policy lose their eec>veness. Tradi>onal Keynesian analysis indicates that increase in government purchases are a more potent tool than decrease taxes. When the government gives a dollar in tax cuts to a household tool than decreases in taxes. Policymakers focused on three kinds of spending. Shovel ready projects such as as repairs to highways and bridges. Federal aid to state and local government. Increased payments to the jobless through the unemployment insurance system.
  • 13. Goods and services market Labor Market Financial Market Interest, money supply, Stock price,Exchange rate Labor demand, Labor demand employment Market type in macroeconomics Consump>on+ Investment + Government expenditure +export-import
  • 14. Con: The government should ght recessions with tax cuts Ronald Wilson Reagan John Fitzgerald "Jack" Kennedy,
  • 15. Con: The government should ght recessions with tax cuts Tax cuts have important inuence on both aggregate demand and aggregate supply. Tax cuts increase aggregate demand by increasing households disposable supply and inducing increased spending on investment goods. When government reduces marginal tax rates, workers keep a higher frac>on of any income they earn. There are various problems with increasing government spending during recessions. Consumers understand that higher government spending, together with the government borrowing needed to nance it, will likely lead to higher taxes in the future. The an>cipa>on of those future taxes will induce consumers to cut back spending today. Moreover, like most taxes, those in the future will likely cause a variety of deadweight losses.
  • 16. Six debates over Macroeconomic Policy 1. Should monetary and scal policymakers try to stabilize the economy? 2. Should the government ght recessions with spending hikes rather than tax cuts? 3. Should monetary policy be made by rule rather than by discre>on? 4. Should the central bank aim for zero ina>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?