Analyzing Six Key Debates in Macroeconomic Policy (ECON 101)

This essay delves into six critical debates within macroeconomic policy. It begins by emphasizing the importance of stabilizing the economy, arguing that it benefits everyone by allowing rational decision-making and adapting to marginal changes and external factors. The essay then explores the debate over monetary policy, contrasting the merits of rules-based versus discretionary approaches, and the potential for abuse of discretion, especially by politicians or incompetent central banks, highlighting potential negative impacts on the economy, such as inflation and market failures. The essay uses examples like the Kenyan economy and the 2018 FIFA World Cup to illustrate these points. The conclusion favors rules-based monetary policy due to the potential for abuse inherent in discretionary approaches. The essay also references several academic sources to support its arguments.

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SIX DEBATES OVER MACROECONOMIC POLICY
Stabilizing the Economy
Policy makers need to stabilize their economy because this benefits everyone in the
economy. Following the principle ‘Rational people think at the margin’ it is evident that
economists are persons that do their bests in order to achieve their goals. Hence it is important
for the economy to be stable because this way they can achieve their objectives systematically.
With a stable economy, fluctuations are expected. The fluctuations can be looked at as marginal
changes which are a small adjustment to a plan or action. Rational people tend to make changes
in regards to what they are doing. Economists will, therefore, be able to make a decision based
on the marginal costs or marginal benefits to one that leads to the achievement of their goals.
Also, a stable economy allows one to ‘lean against the wind’. In other words, one will use
the state of the economy to look for demand output and also offer employment. All one needs to
do is look at the economy and know where and what the demand is. For example, a country like
Kenya is experiencing floods. Many people are not able to get to their jobs because of the floods
affecting employment situations in many organizations (Walsh 23). With a stable economy, they
will be able to carry on with little employment available that they have until the rains pass. In
this instance, economists have to adjust to the macro-environment while still keeping afloat.
Another example is the 2018 FIFA World Cup that is scheduled to begin from 14th June to 15th
July. With a stable economy plane, ticket prices to Russia where the event is taking place will

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not inflate. These benefits everyone since all people will be able to go because the prices will be
affordable. Therefore it is correct to say that a stable economy is very essential.
Should Monetary Policy Be Made By Rule Or Discretion?
One of the economic principles ‘People Respond to Incentives’ basically states that
people tend to act due to a punishment or a reward (incentive). The person’s actions are based
on an incentive. For example, if fuel prices are high then a person with a car will prefer walking
when it is a short distance as opposed to driving in order to save on the fuel. Therefore with
discretion, there can be abuse especially politically. Politicians will tend to act in ways that will
favor them winning in elections because the reward (incentive) is them being in power. People
are driven by power and will do anything to be in power thus discretion will allow persons
especially politicians to abuse power (Mankiw 45).
In addition, discretion can cause great harm if the Central Bank is incompetent. If the
Central Bank does not have the skills required lay down the macroeconomic policy, they can
cause harm to an economy. Instead of an economy that benefits everyone, there will be one
where prices are inflated and demand in the market is low. Price inflation is a huge problem
since most people follow the principle ‘the cost of something is what you get for it’. When prices
are high the number of people purchasing the product becomes low because people look at the
benefits of purchasing the product. If it is the benefit is not worth the money being spent then
they are more likely not going to purchase it. This generally affects the economy because there is
no profits or returns to the business (Holmgren 45).
Discretion also poses a problem if it is in the hand of a bad Central Bank. In this case, the
government is unable to provide a market for the people. One of the economist principles is that
‘government can improve market outcomes’ but if the Central Bank lays out policies that do not

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accomplish this then there is no demand and thus the economy fails. A good example is a case in
which Cambridge Analytica was accused of manipulating Kenyan elections. In this case, it can
be stated allegedly that with the discretion of monetary policy Kenya was able to abuse this in
order to fund politicians and with the help of Cambridge Analytica. Another example increases
in fuel prices worldwide. With discretion, the Central Bank promises price stability but this does
not happen when a recession occurs (Barwell 56). Thus the people are faced with price inflation
in fuel.
In conclusion, discretion is not good and only benefits the people that are in power and
are able to make the monetary policy.

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Works Cited
Barwell, Richard. Macroeconomic Policy After the Crash: Issues in Monetary and Fiscal Policy.
Springer, 2017.
Holmgren, Mark. "From Continuous to Discrete: An Alternative Approach to Teaching
Consumer Choice." Journal of Economics Teaching 2.1 (2017): 1-13.
Mankiw, N. Gregory. Principles of macroeconomics. Cengage Learning, 2014.
Walsh, Carl E. Monetary theory and policy. MIT press, 2017