In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?
Do nothing
According to the active policy position, eliminating a contractionary gap
should be accomplished by stimulating aggregate demand
According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-1 attain equilibrium at potential output?
Either the money supply or government spending should be increased.
An economy that self-corrects an expansionary gap will experience stagflation.
True
The formulation of active policy is
more effective if the natural unemployment rate can be easily calculated
Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the
decision-making lag
If the time for an economy to self-correct is shorter than the active policy lags,
active policy will likely be destabilizing
Those who favor an active approach to policy believe that
despite the lags involved, implementing discretionary policy is preferable to inaction
According to the rational expectations school,
people form expectations, in part, by considering the probable future actions of government policy makers
Some economists believe that when workers and firms come to expect an expansionary monetary policy and the resulting inflation,
the expansionary monetary policy will have no effect on either output or employment
If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent,
output would fall
The time inconsistency problem arises when
policy makers have an incentive to mislead people about their monetary policy intentions
Economists of the rational expectations school
believe workers and firms make decisions based on what they think monetary policy will be in the future
Along the short-run Phillips curve, when the unemployment rate goes down,
inflation rate goes up
Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would
be represented as a point above the short-run Phillips curve
An increase in the expected inflation rate will
shift the short-run Phillips curve upward and to the right
Some economists believe that in the long run the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line.
True
If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases, the economy will (in the long run)
move toward point d
According to the natural rate hypothesis, the economy tends toward
the natural rate of unemployment in the long run
According to the natural rate hypothesis, unemployment can
be maintained below the natural rate only at the cost of ever-increasing inflation