macsg15 - 15 [30] Policy Timing, Deficit Targeting, and...

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391 15 [30] Policy Timing, Deficit Targeting, and Stock Market Effects C hapter objectives: 1. Distinguish the three types of time lag in stabilization policies. Discuss the problems time lags cause for stabilization policy. 2. Outline the responses of the government to the large federal deficits of the late 1980s and early 1990s. Discuss the objectives and drawbacks of the Gramm- Rudman-Hollings (GRH) Bill and the proposed balanced-budget amendment of 1995. 3. Use the concept of the deficit response index to demonstrate the effects on the deficit of a cut in government spending. 4. Describe the function of bonds in capital investment and explain the relationship between bond prices and the interest rate. 5. Distinguish between stocks and bonds and identify those factors that can influence the price of a stock. 6. Outline the recent behavior of the stock market. 7. Analyze the macroeconomic effects of a change in stock prices. 8. Describe and explain the impact on macroeconomic variables of the stock market’s behavior from 1995 to 2000. This chapter contains an assortment of topics, each of which deepens our understanding of the complexity of conducting macroeconomic stabilization policy and the environment in which it must operate. It gives you a good opportunity to review your understanding of the macroeconomic model that Case, Fair and Oster have constructed and to analyze the economics behind topical issues and your own political beliefs. BRAIN TEASER I: This chapter notes that the Fed can manipulate the economy by adjusting interest rates. The money supply is adjusted, but only as a way to change interest rates. An issue that has long occupied economists is: “Does money matter?” Does the quantity of money in the economy have an influence on economic conditions or is it merely the handmaiden of interest rates? BRAIN TEASER II: Your firm is planning to buy additional capital equipment in the near future. Your firm can borrow from a bank, issue bonds, or sell stock. The first two of these options increase the firm’s indebtedness, but the third does not. Why is there this difference?
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392 Study Guide to Principles of Macroeconomics OBJECTIVE 1: Distinguish the three types of time lag in stabilization policies. Discuss the problems time lags cause for stabilization policy. Fiscal and monetary stabilization policies are intended to smooth out fluctuations in output, employment, and prices, but policy actions do not operate immediately. There are time lags . Economists distinguish three: (a) The recognition lag is the time between the development of a problem and its recognition. (b) The implementation lag is the time necessary to hammer out and enact a policy following the recognition of the problem. Implementation lags tend to be shorter for monetary policy than for fiscal policy. (c)
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macsg15 - 15 [30] Policy Timing, Deficit Targeting, and...

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