Chapter 16: The monetary and fiscal policy mix
16. The monetary and ﬁscal policy mix* AGGREGATE DEMAND AND SUPPLY In this lecture, I shall discuss the strategy of what economists call demand management – the policies of the government, including the Federal Reserve, that aﬀect the aggregate spending of the population on goods and services and so act upon the economy. I refer to the economy as a whole, not to particular products or markets. I distinguish demand from supply in the following sense: During business cycles the economy is not always constrained by its capacity to produce, its supply potential. Cyclical ﬂuctuations reﬂect variations, for one reason or another, in the overall demand for goods and services, and thus for workers to produce them. In the long run, however, the output of goods and services in the country is clearly limited by the capacity of the economy to produce. ‘Supply-side’ economics concerns the growth of productive capacity. ‘Demand-side’ economics, my main focus in this lecture, has to do with the management of the economy, not for accelerating its long-run capacity growth, but for stabilizing the business cycle and avoiding excesses of unemployment on the one hand and inﬂation on the other. The two ‘sides’ are, however, related in a way that I will be discussing and trying to describe. Some strategies of short-run demand management are better for long-run growth than others. In recent years, I think it is fair to say, the capacity of the economy to produce goods and services – potential output – has...
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