Tutorial_CHAP14

Tutorial_CHAP14 - CHAPTER 14 Stabilization Policy A...

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Chapter Fourteen 1 ® CHAPTER 14 Stabilization Policy A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Fourteen 2 To many economists, the case for active government policy is clear and simple. Recessions are periods of high unemployment, low incomes, and increased economic hardship. The model of aggregate demand and aggregate supply shows how shocks to the economy can cause recessions. It also shows how monetary and fiscal policy can prevent recessions by responding to these shocks. These economists consider it wasteful not to use these policy instruments to stabilize the economy. Other economists are critical of the government’s attempts to stabilize the economy. These critics argue that the government should take a hands-off approach to macroeconomic policy. At first, this view might seem surprising. If our model shows how to prevent or reduce the severity of recessions, why do these critics want the government to refrain from using monetary and fiscal policy for economic stabilization?
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Chapter Fourteen 3 Economists distinguish between two types of lags that are relevant for the conduct of stabilization policy: the inside lag and the outside lag . The inside lag is the time between a shock to the economy and the policy action responding to that shock. This lag arises because it takes time for policymakers first to recognize that a shock has occurred and then to put appropriate policies into effect to deal with it. The outside lag is the time between a policy action and its influence on the economy. This lag arises because policies do not immediately influence spending, income, and employment.
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Chapter Fourteen 4 Some policies, called automatic stabilizers, are designed to reduce lags associated with stabilization policy. Automatic stabilizers are policies that stimulate or depress the economy when necessary without any deliberate policy change. For example, the system of income taxes automatically reduces taxes when the economy goes into a recession, without any change in the tax laws, because individuals and corporations pay less tax when their incomes fall. Similarly, the unemployment insurance and welfare systems
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This note was uploaded on 05/23/2011 for the course ECON 202 taught by Professor Angelatrimarchi during the Fall '10 term at Waterloo.

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Tutorial_CHAP14 - CHAPTER 14 Stabilization Policy A...

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