Exam 16: Alternative Perspectives on Stabilization Policy

Automatic stabilizers start stabilizing the economy as soon as it deviates from its normal course. Explain with an example how this works in a recession.

The Lucas critique argues that because the way people form expectations is based _____ on government policies, economists _____ predict the effect of a change in policy without taking changing expectations into account.

According to the Lucas critique, when economists evaluate alternative policies they must take into consideration:

Many times a monetary policy does not have the effect on the economy that is desired by the regulator. Why does this happen?

Which of the following is an example of a fiscal policy that has no inside lag?

Fiscal policy is a tool the government uses to steer the economy of a country. What are the advantages of active fiscal policy over passive fiscal policy?

Increasing government spending when the economy is in a recession is an example of:

Explain why each of the following statements is a rationale for conducting active or passive policy: a.Economic circumstances can change dramatically between the time that an economic downturn begins and the time when policy actions have an effect on the economy. b.Economists are not very accurate forecasters. c.Increases in government spending generate increases in economic output. d.Fluctuations in economic output have been less severe since World War II.

The political business cycle refers to the:

If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using:

Active economic policy seeks to do all of the following except:

Macroeconometric models of the economy:

Economists who view the economy as naturally stable often argue that:

The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Parliament is an example of a:

Give an example of an economic policy that the government, after announcing the economic policy, will be tempted to renege.

Conducting fiscal policy so that G = T + β (u - u_n), where G is government expenditures, T is tax revenue, u is the unemployment rate, u_n is the natural rate of unemployment, and β is a positive number, is an example of a(n):

The time between when government spending increases and when aggregate demand starts to increase is an example of an:

Assume that in a certain economy, the LM curve is given by Y = 2,000r - 2,000 + 2 (M / P) + u, where u is a shock that is equal to +200 half the time and -200 half the time, and the IS curve is given by Y = 8,000 - 2,000r. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there, and ii. Manipulate M from day to day to keep the interest rate constant at 2 percent. a.Under rule i, what will Y be when u = +200? Under rule i, what will Y be when u = -200? b.Under rule ii, what will Y be when u = +200? Under rule ii, what will Y be when u = -200? c.Which rule will keep output closer to 4,000?

The Phillips curve describing an economy takes the form u = uⁿ - α(π - Eπ). The central bank directly sets the inflation rate to minimize the following loss function, L (u, π) = u + γπ². The symbol u denotes the unemployment rates, uⁿ is the natural rate of unemployment, π is the inflation rate, Eπ is the expected inflation rate, and α and γ are behavioural response parameters of the economy. Private agents form their expectations rationally before the central bank sets the inflation rate. The optimal inflation rate when the central bank operates using a fixed rule will be _____. The optimal inflation rate when the central bank operates with discretion will be _____.

Economic science has provided convincing evidence in favour of the: