mankiw7e-chap15 - Chapter 15: Stabilization Policy

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In this chapter, you will learn: …about two policy debates: 1. Should policy be active or passive? 2. Should policy be by rule or discretion? Chapter 15: Stabilization Policy
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2 CHAPTER 15 Stabilization Policy Question 1: Should policy be active or Should policy be active or passive? passive?
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3 CHAPTER 15 Stabilization Policy Arguments for active policy Recessions cause economic hardship for millions of people. The Employment Act of 1946: “It is the continuing policy and responsibility of the Federal Government to…promote full employment and production.” The model of aggregate demand and supply (Chaps. 9-13) shows how fiscal and monetary policy can respond to shocks and stabilize the economy.
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4 CHAPTER 15 Stabilization Policy Arguments against active policy inside lag : the time between the shock and the policy response. takes time to recognize shock takes time to implement policy, especially fiscal policy outside lag : the time it takes for policy to affect economy. If conditions change before policy’s impact is felt, the policy may destabilize the economy.
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5 CHAPTER 15 Stabilization Policy Automatic stabilizers definition: policies that stimulate or depress the economy when necessary without any deliberate policy change. Designed to reduce the lags associated with stabilization policy. Examples: income tax unemployment insurance welfare
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6 CHAPTER 15 Stabilization Policy Forecasting the macroeconomy Because policies act with lags, policymakers must predict future conditions. Two ways economists generate forecasts: Leading economic indicators data series that fluctuate in advance of the economy Macroeconometric models Large-scale models with estimated parameters that can be used to forecast the response of endogenous variables to shocks and policies
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7 CHAPTER 15 Stabilization Policy The LEI index and real GDP, 1960s source of LEI data:
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This note was uploaded on 06/12/2011 for the course ECON 101 taught by Professor Dee during the Spring '10 term at Andhra University.

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mankiw7e-chap15 - Chapter 15: Stabilization Policy

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