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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 16: The monetary and fiscal policy mix

James Tobin


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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