Jim Whitney

Economics 101

Controversies over stabilization policies  
    A key debate over stabilization policy is whether Congress and the President can successfully affect AD through fiscal policy.
    Keynesians are the activists: they believe that self-correction cannot be relied on, and that fiscal policy can successfully shift AD.
    The critics are nonactivists: they believe that self-correction can work if markets are allowed to function, and that AD does not shift with fiscal policy--instead, some other spending sector of AD changes to offset the effects of the fiscal policy itself.
    The basic AD equation can be used to illustrate the debate. Note from the AD equation that only four things can happen if G rises: AD can rise, or C, I, or (X-M) can fall. In other words, the economy can expand (AD and Y increase) or some non-government spending can get "crowded out."
 

						Expansionary  fiscal policy: +G
AD	=	C	+	I	+	G	+	(X-M)
Keynesians:  AD and Y  rise due to the extra spending		New classicals:  C falls as people plan for future taxes and save more		Monetarists:  I falls as more government  borrowing  raises i-rates				Global economy:  (X-M) falls since  the dollar appreciates  as savers shift to the U.S. when i-rates rise

 
    Another perspective is supply-side economics, which focuses on AS instead of AD. Supply siders argue that lower taxes and less government regulation can raise efficiency and growth by encouraging people to work, save and invest, thereby shifting LRAS and SRAS to the right.