1. Most economists agree that monetary policy is usually preferred to discretionary fiscal policy to reverse the effects of a recession. Wide gaps in economic debate of the 20 th century are narrowing. There are a few concepts that share broad acceptance across macroeconomics.

Is Expansionary Monetary Policy Helpful in Fighting Recessions? Classical economists didn’t believe that monetary policy would reverse a recession. Keynesians thought it could have limited effectiveness. Friedman convinced economists that monetary policy is effective Now all macroeconomists now agree that monetary policy can be used to shift the aggregate demand curve to reduce economic instability. Now –it is generally agreed that monetary policy is ineffective only in the case of a liquidity trap

Is Expansionary Fiscal Policy Effective in Fighting Recessions? Classical Macroeconomists were even more opposed to fiscal expansion than monetary expansion. Keynesians gave fiscal policy a central role in fighting recessions Monetarists argued that fiscal policy was ineffective as long as the money supply was held constant. TODAY-Most macroeconomists agree that fiscal policy like monetary policy can shift the aggregate demand curve Most agree that the federal government should not seek to balance the budget regardless of the state of the economy; the role of the budget as an automatic stabilizer helps keep the economy on an even keel

Can Monetary or Fiscal Policy reduce unemployment in the Long-run? Most macroeconomists now accept the Natural rate hypothesis and agree on the limitation of monetary and fiscal policy They believe that both policies can limit the size of fluctuations of the actual unemployment rate around the natural rate but can’t keep unemployment below the natural rate

Should Fiscal Policy be used in a Discretionary way? Many but not all, economists believe that discretionary fiscal policy is usually counterproductive due to the lags in adjusting fiscal policy that can end up making things worse or do the opposite of what they intended. As a result monetary policy is touted as the lead role in economic stabilization.

Should Monetary Policy be used in a Discretionary Way? Monetary policy should play a main role in stabilization policy Central bank should be independent, insulated from political pressures, in order to avoid a political business cycle. Discretionary fiscal policy should be used sparingly, both because of policy lags and the risks of a political business cycle.

Last and not least The Federal Reserve does not announce a target rate of inflation but its actions are consistent with a target of about 2%

Supply Side Policies of Economics asp asp ly-side/supply-side-policies/ ly-side/supply-side-policies/ side-economics/ side-economics/