CHAPTER 12.MONETARY AND FISCAL POLICY 281 LM DE E Interest rate Ez Yo Income, output FIGURE 12-10 EXPANSIONARY POLICIES AND THE COMPOSITION OF OUTPUT. a boom. Over time, given enough cycles, the government sector becomes very small, as a conservative would want it to be. The counterpart view belongs to those who believe that there is a broad scope for government spending on education, the environment, job training and rehabilitation, and the like, and who, accordingly, favor expansionary policies in the form of increased government spending and higher taxes to curb a boom. Growth-minded people and the construction lobby argue for expansionary policies that operate through low interest rates or investment subsidies. The recognition that monetary and fiscal policy changes have different effects on the composition of output is important. It suggests that policymakers can choose a policy mix-a combination of monetary and fiscal policies-that will not only get the economy to full employment but also make a contribution to solving other policy problems. We now discuss the policy mix in action. 12-5 THE POLICY MIX IN ACTION In this section we review the U.S. monetary-fiscal policy mix of the 1980s, the economic debate over how to deal with the U.S. recession in 1990 and 1991, the behavior of mon- etary policy during the long expansion of the late 1990s and the subsequent 2001 reces- sion and its recovery, the use of fiscal policy during the Great Recession of 2007-2009,4. In Figure 12-10 the economy can move to full employment by an expansion in either money or the full-employment deficit. Which policy leads to E, and which to E,? How would you expect the choice to be made? Who would most strongly favor moving to E ? versus E,? What policy would correspond to "balanced growth"