POLICYCONTROVERSIESCLASS

POLICYCONTROVERSIESCLASS - 1 Macroeconomic Policy Issues...

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Unformatted text preview: 1 Macroeconomic Policy Issues and Controversies ¡ Overview of Macro Policy ¢ SR versus LR ¢ Expectations and Credibility ¢ Taylor Rule ¡ Practical 1 Macroeconomics ¡ Gov’t Deficits and debt ¡ Evolution of Macro ¡ Financial Crisis of 2007 ¡ Current Controversy ¡ Krugman return of dep econ ¡ 200 years ? Can the Government influence macro conditions? Should they? ¡ Short-Run – Keynesian – Yes ¢ Economy unstable ¢ Fiscal/ Monetary policy impact agg D ¡ Long-Run – Classical – Perhaps Not 2 ¢ Economy self-adjusting if left alone ¢ Fiscal Policy – crowding out – no effect ¡ May be destabilizing in short-run – pro-cyclical ¢ Monetary Policy – only P ¡ May be destabilizing in SR - Pro cyclical ¢ Vertical Phillips curve ¢ Rational Expectations In the News? 3 2 Course Issues ¡ LAST CLASS – Friday 12/10 o Investment Game, Suggestions Weds noon ¢ Extra Credit – MON 12/13 post on assignments (attachment) ¡ FINAL EXAM ¢ How to study – Review Guide, Essential Questions ¢ Chat Room, Study groups Q&A 4 ¢ Q&A ¢ Course Evals & Surveys (3) ¡ FINAL EXAM CONFLICTS –see me NOW ¢ Finalexams.rutgers.edu ¡ Q&A Tues 12/20 1pm Murray 210 ¡ FINAL EXAM Weds12/22 8-11am (sun up) CAC Gym ¡ Book Exchange Discretion versus Rules (monetary policy) ¢ Position Depends on Views on: ¡ stability of economy – self adjusting or unstable ¡ political interference - business cycle lags 5 ¡ Lags and possible Pro cyclical policy ¡ Uncertainty ¡ Expectations ¢ credibility and time inconsistency ¢ nominal = real +expected inflation ¢ wages, interest rates Rules (monetary policy) ¢ Fixed – Constant Ms Growth Rate ¡ Friedman ¢ MV=Py -> %ch M=%ch y ¢ no political interference ¢ credible, no time inconsistency ¢ Feedback ¡ responds in predictable way to economic conditions 6 ¡ responds in predictable way to economic conditions ¡ Taylor Rule ¢ Nom ff rate = inflation rate + real ff rate target +.5*(inflation gap) + .5*(output gap) ¡ Originally descriptive - Now prescriptive ¢ Greenspan fits well; ¢ Burns – Ffrate ‘too low’ -> inflationary ¢ Volcker ff higher -> ‘contractionary ¢ NOW? negative 3 How Do Expectations Matter? ¡ Shifting SR Phillips Curve ¢ Inflation = Exp Infl - h(U-Un)+S Shocks ¢ Exp infl up -> Actual Inflation up ¢ Shifts SR Phillips curve to right (bad) ¢ Expecting inflation causes inflation ¡ Changes output - Lucas Supply Function ¢ Y=Ypotential +f(P-Pexpected) 7 ¢ Shifts in agg S ¡ Nominal and Real Interest Rates ¢ i nom= i real + infl ¡ How to shape expectations? ¢ Nominal anchors ¢ Credibility ¢ Transparency ¢ Time inconsistency problem - Rules versus discretion Federal Budget Overview 8 Federal budget deficits and debt 9 4 Composition and Consequences 10 Harm of federal gov’t budget deficits and the national debt?...
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This note was uploaded on 02/08/2011 for the course ECONOMICS 220:103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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POLICYCONTROVERSIESCLASS - 1 Macroeconomic Policy Issues...

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