Gordon_Answers11e_ch14 - Chapter 14 Stabilization Policy in...

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Chapter 14 Stabilization Policy in the Closed and Open Economy 155 The discussion in the introductory Section 14-1 has been expanded. In Section 14-2, the subsection “Rules Advocates and Activists’ Paradise” has been eliminated. In Section 14-3, discussion about the subsection “The Negative Case for Rules” has been supplemented with additional explanation. Figure 14-2 in Section 14-4 has been updated to the year 2007. The analysis of specific time periods has been changed from 1961–73, 1974–87, and 1988–2004 to 1961–75, 1976–90, and 1991–2007. Section 14-5 has undergone significant changes. The title of the case study has been changed from “Was the Fed Responsible for the Decline in Economic Volatility” to “Was the Fed Responsible for the Great Moderation?” Similarly, the title of Subsection 14-5(a) has been changed from the title in the 10th edition. Figure 14-3 has been updated to the year 2007 and the calculation of log output ratio has changed. Title of the subsection “Causes of Decreased Volatility: Smaller Shocks” has been changed. Similarly the title of another subsection “The Role of the Fed” has changed and the discussion part has been expanded. Figure 14-3 has been updated to the year 2007. The last subsection “Overall Rating of the Fed” from the 10th edition has been deleted, and it is replaced by new a subsection “The Fed’s Controversial Easing After 2000” with new discussion. There is no change in Section 14-6. In Section 14-7, there are minimal changes as the Figure 14-5 has been updated to the year 2007, and there are some changes in the numerical examples. Section 14-8 has gone through significant changes, as a new box “How the Fed Reinvented Instability in Residential Construction” has been added with two new figures about residential construction and home equity borrowing. Section 14-9 has gone through minimal changes. The graphs in the IP Box : The Debate about Euro have been updated to include data upto the year 2008. ± Answers to Questions in Textbook 1. a. Exogenous variables and parameters: t , T a , G , NX a , ,, ap CI ′′ M s / P , s , nx , c or (1 s ), b , f , h . b. Endogenous variables: Y , r . c. Target variables: Y , r . d. Policy instruments: t , T a , G , M s / P (since P doesn’t vary, setting M s determines M s / P ). e. The endogenous variables are identical to the target variables. f. The policy instruments are a subset of the exogenous variables. 2. The monetary policy variable is M s , or M s / P , since P is constant. The fiscal policy variables are t , T a , and G . 3. There are four policy instruments. There are two target variables. Yes, there are at least two policy instruments. Hence, they are sufficient in number to determine the targets. 4. Rules advocates argue that the private economy is stable and that there are no significant or lengthy demand disturbances as long as fixed, stable policies are followed. Monetarists argue that activist policy is undesirable because it is disruptive.
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156 Gordon • Macroeconomics, Eleventh Edition 5. Under a rigid rule, there would be no change in the policy instrument. For example, under the
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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_ch14 - Chapter 14 Stabilization Policy in...

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