KrugAP2e Module36 Lecture

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KRUGMAN’S
Economics
SECOND EDITION for AP®
Section 6
Module 36
• List and describe the elements of the modern
macroeconomic consensus
• Explain the main remaining disputes
What You
Will Learn in
this Module
Section 6 | Module 36
Five Key Questions About Macroeconomic Policy
Classical Keynesian Modern
macroeconomics macroeconomics Monetarism consensus
Is expansionary monetary Yes, except in

policy helpful in fighting No Not very Yes special
recessions? circumstances
Is expansionary fiscal policy
effective in fighting No Yes No Yes
recessions?
Can monetary and/or fiscal
policy reduce No Yes No No
unemployment in the long
run?
Should fiscal policy be used No, except in

in a discretionary way? No Yes No special
circumstances
Should monetary policy be No Yes No Still in dispute

used in a discretionary way?
FYI Supply-Side Economics
• The core of the “supply-side economics” • Almost all economists agree that tax cuts
view of economic policy was the belief that increase incentives to work and invest.
reducing tax rates, and so increasing the However, attempts to estimate these incentive
incentives to work and invest, would have a effects indicate that, at current U.S. tax levels,
powerful positive effect on the growth rate they aren’t nearly strong enough to support the
of potential output. strong claims made by supply-siders.
Should Monetary Policy Be Used in a
Discretionary Way?
There is a broad consensus among macroeconomists on these points:

– Monetary policy should play the main role in stabilization policy.
– The central bank should be independent.
– Discretionary fiscal policy should be used sparingly.
Should Monetary Policy Be Used in a
Discretionary Way?
• However, there are debates over how the central bank should set its policy.
•
• The questions:
– Should the central bank be given a defined target or the discretion to
manage the economy?
– Should the central bank manage asset prices?
– What should the central bank do when conventional policy has reached it
limits?
The Clean Little Secret of Macroeconomics
The clean little secret of modern macroeconomics is how much

consensus economists have reached over the past 70 years.
Summary
1. The modern consensus is that monetary and fiscal policy are both effective in
the short run but that neither can reduce the unemployment rate in the long
run.
2. Discretionary fiscal policy is considered generally unadvisable, except in

special circumstances.
3. There are continuing debates about the appropriate role of monetary policy.

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Is expansionary monetary Yes, except in

Should fiscal policy be used No, except in

Should monetary policy be No Yes No Still in dispute

There is a broad consensus among macroeconomists on these points:

The clean little secret of modern macroeconomics is how much

2. Discretionary fiscal policy is considered generally unadvisable, except in

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