Make a journal entry analyzing ONE of the two debates

• include:
  • the basics question being asked and the principles addressed
  • a summary of the arguments on both sides of the debate
  • your viewpoint on the debate - which side would you take?
  • why you would choose that side

B Rules or Discretion? Question being asked: Monetary Policy - should we follow rules or allow discretion? Arguments The Case for Rules The Case for Discretion + Allowing central banks discretion could do great harm if they are incompetent + Discretion allows flexibility to react to unforeseen events + Discretion allows the possibility of abuse + Political business cycles and time-inconsistency are theoretical possibilities but not that important in o Using monetary policy to affect election outcomes, causing fluctuations called the \"political practice business cycle\" Itis difficult to specify rules precisely and to determine what the best rule would be Central bankers who promise price stability may renege if a recession occurs Time-inconsistency: the discrepancy between actual policy and announced palicy ~ Active Stabilization Question being asked: Should policymakers try to stabilize the economy? Arguments The Case for Active Stabilization The Case Against Active Stabilization Left on their own, economies tend to fluctuate Monetary and fiscal policy work with long lags, so policy must act in advance of economic changes o Pessimism of households and firms causes a fall in AD, which causes a recession The shows that cause fluctuations are unpredictable, and forecasting is highly imprecise + Policymakers can \"lean against the wind\" + If palicy takes effect too late, it will worsen fluctuations o Use monetary and fiscal policy to stabilize AD, output, and employment + So, we should leave the economy to its own devices A more stable economy benefits everyone Also for your consideration: Would you be more likely to support active stabilization policy if wages, prices, and expectations adjust quickly in respanse to economic changes, or if they adjust slowly? If wages, prices, and expectations adjust slowly, it will take longer for the economy to return to its natural rates of output and employment If that is the case, there's a better chance that expansionary policy will act in time to alleviate recessions, rather than push the economy into an inflationary boom