Policy Debates

Summary

In the previous section we learned that the Fed and the government use monetary policy and fiscal policy to steer the economy. But the efficacy of monetary policy and fiscal policy is heavily debated. Both supporters and dissenters raise many questions as to the exact working details of monetary policy and fiscal policy.

One major area of debate is whether monetary policy and fiscal policy should be run by active control or whether they should be dealt with more passively. One side believes that the Fed and the government cannot react to economic changes with enough speed to justify active policy and that instead passive policy is more productive and safer. The other side believes that fast action through active policy is the surest and safest way to keep the economy on track.

Another major area of debate in the realm of macroeconomics deals with the budget deficit. There are numerous questions that surround the budget deficit debate. For instance, should the budget be balanced? What is the burden of the national debt? What are the long-term effects of an unbalanced budget? The answers to these questions divide economists.

This SparkNote covers two major economic policy debates that relate directly to money and to the economy. These debates are important since they often divide economists. Similarly, by understanding these debates, it is possible to view the complexity of macroeconomic policy in the real world. While macroeconomic theory seems rather black and white, the application of this theory to the real world is nowhere near this simple.