Module 30: Long-Run Implications of Fiscal Policy: Deficits and the Public Debt

Module 31: Monetary Policy and the Interest Rate

Module 32: Money, Output, and Prices in the Long Run

Module 33: Types of Inflation, Disinflation, and Deflation

Module 34: Inflation and Unemployment: The Phillips Curve

Module 35: History and Alternative Views of Macroeconomics

Module 36: Consensus and Conflict in Modern Macro-economics

Economics by Example: “Will Technology Put Us All Out of Work?”

Jim Cramer’s Mad Money is one of the most popular shows on CNBC, a cable TV network that specializes in business and financial news. In January of 2014, Cramer touted the “invisible positives” in the economy, such as companies with enough financial strength to pay billions of dollars to acquire other companies. It was a different story on August 3, 2007, when Cramer was so alarmed about negatives he felt were invisible to the Federal Reserve that he screamed about Fed leaders:

“Bernanke is being an academic! It is no time to be an academic. . . . He has no idea how bad it is out there. He has no idea! He has no idea! . . . and Bill Poole? Has no idea what it’s like out there! . . . They’re nuts! They know nothing! . . . The Fed is asleep! Bill Poole is a shame! He’s shameful!!”

Who are Bernanke and Bill Poole? In the previous chapter, we described the role of the Federal Reserve System, the U.S. central bank. At the time of Cramer’s tirade, Ben Bernanke, a former Princeton professor of economics, was the chair of the Fed’s Board of Governors, and William Poole, a former Brown professor of economics, was the president of the Federal Reserve Bank of St. Louis. Both men, because of their positions, are members of the Federal Open Market Committee, which meets eight times a year to set monetary policy. In 2007, Cramer was crying out for the Fed to change monetary policy in order to address what he perceived to be a growing financial crisis.

Why was Cramer screaming at the Federal Reserve rather than, say, the U.S. Treasury—or, for that matter, the president? The answer is that the Fed’s control of monetary policy makes it the first line of response to macroeconomic difficulties—very much including the financial crisis that had Cramer so upset. Indeed, within a few weeks, the Fed swung into action with a dramatic reversal of its previous policies.

In Section 4, we developed the aggregate demand and supply model and introduced the use of fiscal policy to stabilize the economy. In Section 5, we introduced money, banking, and the Federal Reserve System, and began to look at how monetary policy is used to stabilize the economy. In this section, we use the models introduced in Sections 4 and 5 to further develop our understanding of stabilization policies (both fiscal and monetary), including their long-run effects on the economy. In addition, we introduce the Phillips curve—a short-run trade-off between unexpected inflation and unemployment—and investigate the role of expectations in the economy. We end the section with a brief summary of the history of macroeconomic thought and how the modern consensus view of stabilization policy has developed.