Answer to Question #92276 in Macroeconomics for Sidney

Question

• Identify an article, which has a direct bearing on macroeconomics and write a brief
summary of the macroeconomic issues raised in the article. [5 Marks]
• Discuss in detail the market structure that best describes the sector being discussed
and support your selection.
• Discuss the relevant macroeconomic theory/ies, which can be applied to understand
the phenomenon being discussed in the article. Conclude by advising how to improve
the performance of the business discussed in the article taking into account the
macroeconomic issues raised

Answer 1

Macroeconomics vs Modern Money Theory: Some Unpleasant Keynesian Arithmetic

The last decade has witnessed a significant revival of belief in the efficacy of fiscal policy and mainstream economics is now reverting to the standard positions of mid1970s Keynesianism. On the coattails of that revival, increased attention is being given to the doctrine of Modern Money Theory (MMT) which makes exaggerated claims about the economic costs and capability of money-financed fiscal policy. MMT proponents are now asserting society can enjoy a range of large government spending programs for free via money financed deficits, which has made it very popular with progressive policy advocates. This paper examines MMT’s assertion and rejects the claim that the US can enjoy a massive permanent free program spree that does not cause inflation. As has long been known by Keynesians, in a static economy money financed deficits can be used to finance programs when the economy is away from the full employment - inflation boundary. However, that window will be temporary to the extent that those deficits drive the economy to full employment. Since the programs are permanent they have to be paid for with taxes or they will generate inflation. That is the economic logic behind the unpleasant Keynesian arithmetic. 

Reference

Palley, T. (2019). Macroeconomics vs Modern Money Theory: Some unpleasant Keynesian arithmetic (No. PKWP1910).