Explain the mainstream economists’ justification for the use of discretionary fiscal and monetary policy and their criticisms of policy rules.
What will be an ideal response?
Mainstream economists think that discretionary fiscal and monetary policy can be effective and are opposed to a monetary rule and a balanced budget requirement. They see velocity as relatively unstable and a loose link between changes in the money supply and aggregate demand. This means that a monetary rule might produce too great a shift in aggregate demand (and demand-pull inflation) or too small a shift (and deflation) to match the shift in aggregate supply. Such a rule would contribute to price instability, not price stability. They support the use of fiscal policy during a recession or to counter growing inflation. Fiscal policy, however, should be reserved for those situations where monetary policy is relatively ineffective. They also oppose a balanced budget amendment because its effects would be pro cyclical and reinforce recessionary or inflationary tendencies, rather than being counter cyclical. Mainstream economists also note that there has been greater stability in the macro economy since 1946 when discretionary monetary and fiscal policy was being more actively used to moderate the effects of the business cycle.
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Why does the government work to eliminate artificial barriers to entry?
What will be an ideal response?
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a. True b. False Indicate whether the statement is true or false