Summary15 - 4. Can the attempts by the government to make...

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CHAPTER 15 SUMMARY: 1. What is stabilization policy? Stabilization policy involves both monetary and fiscal policy. The ultimate goal of stabilization policy is to smooth out fluctuations in output and employment and to keep prices stable. 2. How does the FED use monetary policy to stabilize the economy? As the economy expands, when unemployment is low and real GDP growth is high, the Fed uses open market operations to raise interest rates to prevent the economy from growing too quickly. The Fed lowers interest rates during periods of low inflation and high unemployment, to lessen the impact of a contraction. 3. How do lags affect stabilization policy? Stabilization policy goals are not necessarily easy to achieve because of the existence of lags in the response of the economy to macropolicies. The policy impact may hit the economy at the wrong time having the opposite of the intended effect. There are several different types of lags: recognition lags, implementation lags, and response lags.
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Unformatted text preview: 4. Can the attempts by the government to make the economy better actually make it worse? Some critics claim that, because of the time lags, stabilization policies are ineffective. Others claim that such policies actually destabilize the economy. They liken the government's attempts to control the economy to a "fool in the shower." 5. What has the government done about the deficit and the debt? Has anything worked? Several efforts to reduce the budget deficit have been attempted by Congress and the executive branch. The Graham-Rudman-Hollings Bill, the Omnibus Budget Reconciliation Act of 1993, and recent attempts to pass the Balanced Budget Amendment are all such attempts. The recent elimination of the deficit, however, came about as a result of prolonged and strong economic growth as much as by any deficit reduction measure....
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