Gordon_Answers11e_ch18 - Chapter 18 Conclusion: Where We...

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Chapter 18 Conclusion: Where We Stand 199 rate has been so much higher than that of the U.S. and why it has persisted for so long; the necessary emphasis on fiscal policy in Europe and the difficulties of conducting fiscal policy in the face of the Maastricht criteria; and the relatively greater reliance on Keynesian theory and policy in Europe. Section 18-6 discusses six unsettled important issues in macroeconomics: how poor countries can achieve economic growth; why productivity growth fluctuates; why the natural rate of unemployment declined; whether zero inflation is a good idea as a policy goal, what is appropriate monetary policy tool; inflation targeting and the Taylor Rule; and why there exist differences among countries with respect to productivity growth, saving, unemployment, the tendency to hyperinflation, and the responses to it. Your presentation should emphasize Gordon’s tone: an honest discussion of the shortcomings of macroeconomics. Since this is the end of the course, however, try to leave your students with an appreciation of how much we do know, not how much we don’t! ± Changes in the Eleventh Edition The structure and content of Chapter 18 are largely intact from the Tenth Edition. The new data has been incorporated into Section 18-4, which is now extended to the year 2007. In the same section, discussion about the topic “Economic Behavior 1991–2007” includes the problem of the subprime mortgage and housing market crisis and its possible adverse effect on the economy. The rest of the chapter has remained unchanged mostly. ± Answers to Questions in Textbook 1. Over the period 1923–29, the inflation rate was almost zero, the unemployment rate was below 5 percent, and the output ratio was near 100 percent. This is consistent with an economy that tends toward equilibrium at natural real GDP. The period 1930–33 saw the output ratio fall to 65 percent and the unemployment rate rise to 25 percent. This is inconsistent with an economy that tends toward equilibrium at natural real GDP. Moreover, the output ratio and unemployment rate stayed high until the onset of wartime spending. 2. In the late 1930s, the money supply soared, yet unemployment remained high. The economy did not recover fully until the wartime government spending took effect. This is consistent with old Keynesian theory’s emphasis on fiscal policy. Also, the fact that short-term interest rates were near zero meant that expansionary monetary policy was useless. 3. The reaction of the economy to increased governmental wartime spending tended to confirm the Keynesian emphasis on fiscal policy. In addition, it was seen that an economy that was not responding on its own would respond to governmental spending. This reinforced the view that the Keynesian theory was superior to the classical theory. 4.
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch18 - Chapter 18 Conclusion: Where We...

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