Worth: Mankiw Economics 5e CHAPTER FOURTEEN Stabilization Policy The Federal Reserve 's job is to take away the punch bowl just as the party William McChesney martin tiously turning the steering wheel to adjust to the unexpected irregule ties of the route, but some means of keeping the monetary passenger who is in the back seat as ballast from occasionally leaning over and giving the steering wheel a jerk that threatens to send the car off the road Milton friedman How should government policymakers respond to the business cycle? The two quotations above-the first from a former chairman of the Federal reserve, the econd from a prominent critic of the Fed--show the diversity of opinion over how this question is best answered Some economists, such as William McChesney Martin, view the economy as inherently unstable. They argue that the economy experiences frequent shocks to aggregate demand and aggregate supply. Unless policymakers use monetary and fiscal policy to stabilize the economy, these shocks will lead to unnecessary and inefficient fluctuations in output, unemployment, and inflation. According to the popular saying, macroeconomic policy should "lean against the wind, stimulat ing the economy when it is depressed and slowing the economy when it is over heated Other economists, such as Milton Friedman, view the economy as naturally stable. They blame bad economic policies for the large and inefficient fluctua tions we have sometimes experienced. They argue that economic policy should not try to"fine-tune"the economy. Instead, economic policymakers should dmit their limited abilities and be satisfied if they do no harm This debate has persisted for decades, with numerous prot agonists advan various arguments for their positions. The fundamental issue is how policymak ers should use the theory of short-run economic fluctuations developed in the 380 User JoENA: Job EFFo1430: 6264_ch14: Pg 380: 24427#/eps at 100s Mon,Feb18,20021:024MUser JOEWA:Job EFF01430:6264_ch14:Pg 380:24427#/eps at 100% *24427* Mon, Feb 18, 2002 1:02 AM How should government policymakers respond to the business cycle? The two quotations above—the first from a former chairman of the Federal Reserve, the second from a prominent critic of the Fed—show the diversity of opinion over how this question is best answered. Some economists, such as William McChesney Martin, view the economy as inherently unstable.They argue that the economy experiences frequent shocks to aggregate demand and aggregate supply. Unless policymakers use monetary and fiscal policy to stabilize the economy, these shocks will lead to unnecessary and inefficient fluctuations in output, unemployment, and inflation.According to the popular saying, macroeconomic policy should “lean against the wind,’’ stimulat￾ing the economy when it is depressed and slowing the economy when it is over￾heated. Other economists, such as Milton Friedman, view the economy as naturally stable. They blame bad economic policies for the large and inefficient fluctua￾tions we have sometimes experienced.They argue that economic policy should not try to “fine-tune’’ the economy. Instead, economic policymakers should admit their limited abilities and be satisfied if they do no harm. This debate has persisted for decades, with numerous protagonists advancing various arguments for their positions.The fundamental issue is how policymak￾ers should use the theory of short-run economic fluctuations developed in the Stabilization Policy 14 CHAPTER The Federal Reserve’s job is to take away the punch bowl just as the party gets going. — William McChesney Martin What we need is not a skilled monetary driver of the economic vehicle con￾tinuously turning the steering wheel to adjust to the unexpected irregulari￾ties of the route, but some means of keeping the monetary passenger who is in the back seat as ballast from occasionally leaning over and giving the steering wheel a jerk that threatens to send the car off the road. — Milton Friedman FOURTEEN 380 |