684 PA R T V I I Monetary Theory THE DI SCRET I ON ARY/N O N DIS CRET I ON ARY PO LI CY DEBAT E All economists have similar policy goals they want to promote high employment and price stability and yet they often have very different views on how policy should be conducted Advocates of discretionary policy, that is, policy to eliminate high unemployment whenever it appears, regard the self-correcting mechanism through wage and price adjustment (see Chapter 24) as very slow Advocates of nondiscretionary policy, by contrast, believe that the performance of the economy would be improved if the government avoided discretionary policy reactions to eliminate unemployment We will explore this policy debate by first looking at what the policy responses might be when the economy experiences high unemployment Suppose that policymakers confront an economy that has moved to point 1* in Responses Figure 26-11 At this point, aggregate output Y1* is lower than the natural rate level, to High Unemployment and the economy is suffering from high unemployment Policymakers have two viable choices: If they are proponents of nondiscretionary policy and nothing, the short-run aggregate supply curve will eventually shift rightward over time, driving the economy from point 1* to point 1, where full employment is restored The discretionary policy alternative is to try to eliminate the high unemployment by attempting to shift the aggregate demand curve rightward to AD2 by pursuing expansionary policy (an increase in the money supply, increase in government spending, or lowering of taxes) If policymakers could shift the aggregate demand curve to AD2 instantaneously, the economy would immediately move to point 2, where there is full employment However, several types of lags prevent this immediate movement from occurring LRAS Aggregate Price Level, P AS1 AS2 P2 P2* P1* 2* 1* P1 AD2 AD1 Y1* F I G U R E - 11 Yn Y2* Aggregate Output, Y The Choice Between Discretionary and Nondiscretionary Policy When the economy has moved to point 1*, the policymaker has two choices of policy: the nondiscretionary policy of doing nothing and letting the economy return to point or the discretionary policy of shifting the aggregate demand curve to AD2 to move the economy to point