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Fiscal Policy Trade-offs

Fiscal Policy Trade-offs

Note that macroeconomic goals, such as growth and price stability are seemingly opposed to each other. Suppose that real GDP increases (economic growth is considered a good thing), but at the same time the price level increases (and we would like to have price stability). Consider a decrease in aggregate demand, for example if there are cuts in government spending. Note that real GDP falls while the price level does not increase. The conclusion: when aggregate demand shifts, we move toward one goal (growth in real GDP or stable prices) but away from the other. This makes macroeconomic policy difficult. We have more ability to manipulate aggregate demand through fiscal policy (i.e. increasing Government spending and or decreasing taxes) than aggregate supply, but even if we shift the aggregate demand curve through macroeconomic policy we could move against one of our goals, price stability.

Given this, what do you think was the effectiveness of the stimulus packages (fiscal policy) put in place by the Government to get out of the Great Recession of 2008/9? Were they sufficient or too small? Do they have any effect at all? What about the effect on the large national debt? Is bringing down the debt more important than stimulating the economy to reduce the unemployment rate? Who controls Fiscal policy anyway?