ABSTRACT
Macroeconomists have been divided over the possibility and desirability of using fiscal and monetary policy to stabilize the economy and, in particular, to reduce unemployment below what it would otherwise be. This chapter reviews the theory that has been available to inform macroeconomic policy and, possibly, induce policy errors. Economic contraction and deflations have occurred when governments have allowed the money supply to contract. The capitalist economy is not inherently unstable. Left undisturbed, private decisions in competitive markets normally produce the full employment of resources, including labor. The term has to be specified in such a way that sooner or later expectations catch up with the real rate of inflation and the economy returns to its natural rate of unemployment. The chapter contrasts the approaches to stabilization policy associated with the macroeconomic theories. A relatively higher economic stimulus in Canada would reduce Canadian interest rates and provoke a shift of capital out of the country.
