Overview: Stabilization Policy?

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Reading Selections:




The idea that the government has a responsibility to take actions to prevent or cure macroeconomic problems (or to "stabilize the economy") is so widespread today that it is often not realized that this is a relatively new idea, one that developed after 1930. These readings seeks to explain why the idea was uncommon in the 19th century, why it developed, and what problems exist when a government uses macroeconomic policy.

The concept of macroeconomic policy only vaguely existed before the twentieth century. In the United States monetary policy developed after the Federal Reserve System was established in 1914. Keynes and his followers developed the concept of fiscal policy in the 1930s. The Keynesian revolution transformed economics in the 1940s and 1950s. By the 1960s the view that the government could use fiscal policy to "fine tune" the economy was widespread.

After you complete this unit, you should be able to:

  • Give the reason why the theory of rational expectations suggests that no model can ever accurately predict the future performance of the economy.
Copyright Robert Schenk