Exam 18: Alternative Perspectives on Stabilization Policy

Fiscal policy has a relatively long ______ lag, and monetary policy has a relatively long ______ lag.

The inside lag is the time:

Assume that in a certain economy the LM curve is given by Y = 2,000r - 2,000 + 2(M/P), and the IS curve is given by Y = 8,000 - 2,000r + u, where u is a shock that is equal to +200 half the time and -200 half the time. 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. 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 $u = + 200$ ? What will $Y$ be under rule i when $u = - 200$ ? b. Under rule ii, what will $Y$ be when $u = + 200$ ? What will $Y$ be under rule ii, when $u = - 200$ ? c. Which rule will keep output closer to 4,000 ?

Policy is conducted by discretion if policymakers:

The time between a policy action and its influence on the economy is called the:

The manipulation of the economy to win elections is called:

For each of the following policies indicate whether the policy is i. a monetary or a fiscal policy, ii an active or a passive policy, and iii a policy by rules or with discretion: a. the central bank follows a policy of all owing the money supply to grow at a constant 4 percent per year; b. a government follows a policy of keeping government spending over a calendar year equal to government revenue over the cal endar year; c. the central bank uses judgment to adjust the growth of the money supply based on expectations of what will happen to output and inflation over the next five years. d. the government keeps tax laws unchanging and allows government spending to change, depending on which spending bills are passed by the legi sl ature. e. the central bank follows a policy of adjusting the money supply according to a formula based on deviations of unemployment from the natural rate of unemployment.

Economists who view the economy as inherently unstable generally argue that:

Unlike a monetarist policy rule, an inflation target has the advantage of:

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank follows a fixed rule in conducting monetary policy. Initially, households and firms expect high inflation. Following a credible announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.

Policy is conducted by rule if policymakers:

Monetarists believe all of the following except:

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

Policies that stimulate or depress the economy without any deliberate policy change are called:

If a city passes laws limiting rents on apartments but promises to exempt buildings not yet built:

Were the forecasts made by several renowned economists at the time of the Great Depression and the recession of 2008-2009 all correct?

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?

Given that the Philip curve defines an economy as $u = 6 - 0.4 ( \pi - E \pi )$ where u is the unemployment rate and $\pi$ is the inflation rate, and the loss function which tells the social cost of unemployment and inflation is $L = u + 0.05 \pi ^ { 2 }$ ,calculate the optimal level of inflation for the economy.

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.

Monetary policy rules that target nominal variables would target any of the following except the: