Economics DeMYSTiFieD

chapter 16Fiscal Policy and Monetary Policy

Fluctuations in the macroeconomy are common, but large or prolonged swings in unemployment, output, and inflation can have serious effects on an economy. Traditionally, economic theory held that the best course of action when these things happened was to take no action at all. The Great Depression was a dramatic illustration of why this is not always the best idea. The alternative, to “do something,” generally takes the form of using either fiscal policy or monetary policy (or a combination of the two) to affect macroeconomic variables. In this chapter, we examine the classical approach, the methodology involved in using fiscal and monetary policy, and some criticisms that remain of using either to ...