23-lrpc - The Long Run Phillips Curve And Stabilization...

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macroS2010 Lec23-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Long Run Phillips Curve And Stabilization Policy Lecture 23-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. April 19, 2010
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macroS2010 Lec23-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The NAIRU —The N on A ccelerating I nflation R ate of U nemployment and U*
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macroS2010 Lec23-page 3 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Stabilization Policy Stabilization Policy: attempts to employ both monetary and fiscal policy to smooth out fluctuations in output and employment and to keep prices as stable as possible. Business Cycle Policy Counter-cyclical Policy Will it work? What’s Important? » what depends on what – various sensitivities efficacy of policy lags – political realities
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macroS2010 Lec23-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Consider Two Possible Time Paths for GDP or Y* Path A is less stable—it varies more over time—than path B. Other things being equal, society prefers path B to path A. Can stabilization policy get us something more like path B?
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macroS2010 Lec23-page 5 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The recognition lag refers to the time it takes for policy makers to recognize the existence of a boom or a slump. The implementation lag is the time it takes to put the desired policy into effect once economists and policy makers recognize that the economy is in a boom or a slump. The implementation lag for monetary policy is generally much shorter than for fiscal policy. The response lag is the time it takes for the economy to adjust to the new conditions after a new policy is implemented; the lag that occurs because of the operation of the economy itself. E.g., The delay in the multiplier of government spending occurs because neither individuals nor firms revise their spending plans instantaneously.
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macroS2010 Lec23-page 6 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Stabilization Woe: “The Fool in the Shower” Attempts to stabilize the economy can prove destabilizing because of time lags. Milton Friedman likened
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23-lrpc - The Long Run Phillips Curve And Stabilization...

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