This document discusses debates in macroeconomics over the role and effects of government. It outlines different topics of debate between economists, including whether tax cuts raise or lower tax revenue, if the economy is self-regulating or needs government intervention, and whether government spending or tax cuts have a larger impact. It also discusses debates around the size and scope of government, the degree of crowding out from fiscal policy, and whether monetary policy should follow rules or be discretionary.

2. DEBATES INMACROECONOMICS
OVER THE ROLEAND EFFECTS OF
GOVERNMENT
BY: KARYNEL AMORADO

3. MACROECONOMICS AND
GOVERNMENT

4. TOPICS
 TAX CUTS, TAX REVENUE, AND BUDGET
DEFICIT
 THE ECONOMY: SELF-REGULATING OR NOT?
 MORE GOVERNMENT SPENDING OR A CUT IN
TAXES: WHICH GIVES A BIGGER BANG FOR
THE BUCK
 THE SIZE AND SCOPE OF THE GOVERNMENT
 THE DEGREE OF CROWDING OUT
 THE POLITICS OF GOVERNMENT SPENDING
 MONETARY POLICY: RULES VS DISCRETION
 BAILOUTS
 DEMAND-SIDE AND SUPPLY-SIDE VIEW

5. TAX CUTS, TAX REVENUE AND
TAX DEFICIT
TAX REVENUES= TAX BASE X (AVERAGE) TAX
RATE

6. TAX CUTS, TAX REVENUE AND
TAX DEFICIT
 ECONOMIST A
 Tax cuts will raise tax revenue, and increased tax
revenue will decrease the size of the budget
deficit.
 ECONOMIST B
 Tax cuts will lower tax revenue, and decreased
tax revenue will increase the size of the budget
deficit.

7. THE ECONOMY: SELF
REGULATING OR NOT?
 ECONOMIST A
 Wages are flexible, so that if the economy is in a
recessionary gap, it will soon remove itself from the
gap. Government doesn’t have to do anything.
 ECONOMIST B
 Wages are inflexible downward, so that if the
economy is in a recessionary gap, it may be stuck
there. The best course of action is for the federal
government to implement expansionary fiscal policy
or for the Fed to implement expansionary monetary
policy to remove the economy from recessionary gap.

8. MORE GOVERNMENT
SPENDING OR A CUT IN A
TAXES:
 WhenThe economy is in a Recessionary gap and economist call for
a demand-side expansionary fiscal policy measure.

9. MORE GOVERNMENT
SPENDING OR A CUT IN A
TAXES:
 ECONOMIST A
 The economy needs expansionary fiscal policy to
remove it from a recessionary gap. Government
should either raise its spending or cut taxes. I believe
the government spending multiplier is larger than the
tax multiplier, so I suggest government increase its
spending.
 ECONOMIST B
 The economy needs expansionary fiscal policy to
remove it from a recessionary gap. Government
should either raise its spending or cut taxes. I believe
the tax multiplier is larger than the government
spending multiplier, so I suggest government cut
taxes.

10. THE SIZE AND SCOPE OF
GOVERNMENT
SIZE SCOPE

11. THE SIZE AND SCOPE OF
GOVERNMENT
 ECONOMIST A
 Expansionary fiscal policy is needed to raise
aggregate demand and remove he economy from
recessionary gap. The choice of fiscal policy is
between more government spending or a cut in
taxes. Since I am in favor of bigger government, I
choose more government spending.
 ECONOMIST B
 Since I am in favor of smaller government, I
choose a cut in taxes.

12. THE DEGREE OF CROWDING
OUT

13. THE DEGREE OF CROWDING
OUT
 ECONOMIST A
 A rise in government purchase will increase aggregate
demand and remove the economy from the
recessionary gap because little or no crowding out will
occur. A rise in government purchases will end up
increasing the number of jobs in the economy.
 ECONOMIST B
 A rise in government purchase will not increase
aggregate demand and remove the economy from the
recessionary gap because of complete (or nearly
complete) crowding out.

14. THE POLITICS OF
GOVERNMENT SPENDING
 ECONOMIST A
 An expansionary fiscal policy measure is needed
to increase Real GDP, lower the unemployment
rate, and so on. I propose $100 billion more in
government spending. It doesn’t matter what the
$100 billion is spent on; the important thing is
that the money is spent.

15. THE POLITICS OF
GOVERNMENT SPENDING
 ECONOMIST B
 But how the money is spent will be determined by
Congress, and Congress is likely to be motivated
by political interests. Furthermore, not all
spending is the same. Some spending is better
for the economy than other spending. I think
much of the spending that we will get from
Congress will be motivated by politics instead of
by economics, and sometimes the spending
motivated by politics will be of little help in turning
the economy around. In the end, I have my
doubts as to how effective increase in
government spending will be in aiding economy.

16. MONETARY POLICY: RULES VS
DISCRETION
 ECONOMIST A
 A monetary rule is preferred to a discretionary
Fed. The former is more likely to bring about
stable prices, low unemployment, and so on. In
addition, a monetary rule removes monetary
policy from politics.
 ECONOMIST B
 A discretionary Fed is preferred to a monetary
rule. The Fed needs the flexibility to tailor
monetary policy to the existing circumstances.

17. BAILOUTS
AN ACT OF GIVING
FINANCIAL
ASSISTANCE TO A
FAILING BUSINESS
OR ECONOMY TO
SAVE IT FROM
COLLAPSE.

18. BAILOUTS
 ECONOMIST A
 Ideally, bailing out companies is not a good idea.
But company X is a large company, and if it goes
out of business it will adversely affect hundreds of
thousands of persons. To save the innocent, you
sometimes have to save the not-so-innocent.
 ECONOMIST B
 Who is “we” you say, “We lose more by letting
the company fail than by saving it?”. In the end,
this will lead to more companies that “need” to be
bailed out.

19. DEMAND-SIDE AND SUPPLY-
SIDE

20. DEMAND-SIDE AND SUPPLY-
SIDE
 ECONOMIST A
 The aggregate supply curve is vertical. Therefore,
government actions designed to change
aggregate demand in the economy will not lead to
change in Real GDP. Changes in Real GDP come
from the supply side of the economy, not the
demand side. Government has fewer tools
(demand-side fiscal policy and monetary policy
won’t work) capable of raising Real GDP than the
upward-sloping AS economist believes.

21. DEMAND-SIDE AND SUPPLY-
SIDE VIEWS
 ECONOMIST B
 The aggregate supply curve is upward sloping (in
the short run). Government actions designed to
change aggregate demand in the economy will
lead to changes in Real GDP (at last in the short
run). Changes in Real GDP (in the short run) can
come from either the demand side or the supply
side of the economy. Government has more tools
(demand-side fiscal policy and monetary policy do
work) capable of raising GDP than the vertical-AS
economist believes.