chap14 - In this chapter .about two policy debates: 1....

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CHAPTER 14 Stabilization Policy slide 1 In this chapter …about two policy debates: 1. Should policy be active or passive? 2. Should policy be by rule or discretion?
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CHAPTER 14 Stabilization Policy slide 2 Question 1: Should policy be active or Should policy be active or passive? passive?
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Growth rate of real GDP, 1970-2006 -4 -2 0 2 4 6 8 10 1970 1975 1980 1985 1990 1995 2000 2005 Average growth rate Percent change from 4 quarters earlier
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CHAPTER 14 Stabilization Policy slide 4 Increase in unemployment during  recessions peak trough increase in no. of unemployed persons (millions) July 1953 May 1954 2.11 Aug 1957 April 1958 2.27 April 1960 February 1961 1.21 December 1969 November 1970 2.01 November 1973 March 1975 3.58 January 1980 July 1980 1.68 July 1981 November 1982 4.08 July 1990 March 1991 1.67 March 2001 November 2001 1.50
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CHAPTER 14 Stabilization Policy slide 5 Arguments for active policy Recessions cause economic hardship for millions of people. The Employment Act of 1946: “It is the continuing policy and responsibility of the Federal Government to…promote full employment and production.” The model of aggregate demand and supply shows how fiscal and monetary policy can respond to shocks and stabilize the economy.
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CHAPTER 14 Stabilization Policy slide 6 Arguments against active policy inside lag : the time between the shock and the policy response. takes time to recognize shock takes time to implement policy, especially fiscal policy outside lag : the time it takes for policy to affect economy.
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CHAPTER 14 Stabilization Policy slide 7 Arguments against active policy The policies are aimed to affect AD. Inside lag is very long for fiscal policy because of legislative process Outside lag is very long for monetary policy because it first changes interest rate and then investment. People against active policy claim that stabilization policies might be destabilizing.
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Stabilization Policy slide 8 Automatic stabilizers They are designed to reduce the inside lag associated with stabilization policy. They are the policies that stimulate or depress the economy when necessary without any deliberate policy change. Examples:
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chap14 - In this chapter .about two policy debates: 1....

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