the increase in the money supply because (as explained in chapter 9) an increase in the money supply also stimulates the economy. Therefore, the question of whether the increase in income is due to the fiscal policy or the monetary policy is left open.
Monetarists are prominent critics of the Keynesian approach. They claim that crowding-out forces are strong, rendering fiscal policy weak. They also claim that financing fiscal policy by printing money is the only way any substantive impact can be made on GDP, and that that impact is due not to the increase in government spending, but rather to the increase in the money supply. In their view the quantity of money in the economy is the proper focus of attention in analyzing the macroeconomy, something that we have heretofore ignored. The next chapter begins our examination of the role of money.
Media Illustrations
Example 1
I think a lot of people, particularly in the business community and among economists, have realized that much of the present deficit is of a purely cyclical nature. It's resulting from what they call the automatic stabilizers.
What is a deficit of a purely cyclical nature?
A cyclical deficit is created by an automatic fall in tax revenues and rise in certain types of government spending (such as unemployment insurance payments) during recessions.
From what kind of deficit should it be distinguished?
It is to be distinguished from a budget deficit that has arisen due to a discretionary change in government spending or taxing.
What is an automatic stabilizer?
An automatic stabilizer is an increase or decrease in spending that kicks in automatically to stabilize the economy whenever it moves into a recession or a boom.
Example 2
Of course, if Washington needed less cash it would undoubtedly ease the strain on the states and the corporate sector.
What does Washington needing cash mean?
The federal government needs to sell bonds to obtain cash to finance its budget deficit.
What is the strain on the states and the corporate sector that is referred to?
Washington's activity in the bond market has pushed up interest rates, making it expensive for state governments and corporations to borrow.
Example 3
One question is whether the government can steel itself to bring its fiscal policy into line with the central bank's monetary policy. Will the government be able to borrow the
