Macroeconomics Debate Essay

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One of the major issues in macroeconomics is disagreement in the debate over policy activism versus policy rules. What exactly is that disagreement? Any implications? The great debate in macroeconomics is wedged between the policy activism vs. policy rules and which policy will effectively stabilize the economic fluctuation of the business cycle. Policy Activism Concept: Keynesian, activist, "fine-tuning," countercyclical approach to stabilize the economy. Based on the belief that the self-correcting mechanisms (Classical assumptions) work slowly, and policymakers should continually "fine-tune" the economy through an activist approach to policy. Advocates of the passive approach point to the Great Depression or the Housing Market debacle as examples of how perverse monetary and fiscal policy can significantly destabilize the economy. The Fed implemented restrictive monetary policy and Congress implemented restrictive fiscal policy by raising taxes and tariffs to correct depressions and most recently implementing QE4. Policy Rule Concept: Classical approach, assumes that the self-correcting mechanisms will work well, if not hampered by unnecessary “fine-tuning” by policymakers. In fact, advocates of the passive approach believe that erratic, improperly timed activist policies are actually a source of economic instability, and that we would be better off if we maintain stable, predictable fiscal and monetary policy during all phases of the business cycle. Monetarists and Public Choice economists are generally critical of the Activism (Keynesian) approach to policy and alternatively advocate a predictable, rules-based approach to policy. The critics of activism policy point to the many problems facing discretionary "fine-tuning": timing/lag problems, politically motivated business cycles and policy ineffectiveness. Claiming that the activist approach will

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