Econ- Chap 17

Econ- Chap 17 - x Monetary and Fiscal Policy-makers should...

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Monetary and Fiscal Policy-makers should try to Stabilize the Economy. Monetary Policy should be made by an Independent Central Bank. The Central Bank should aim for Zero Inflation. The Government should Reduce its Debt. The Tax Laws should be Reformed to Encourage Saving. CH 17
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EXAM Same format as December Monday April 18---9AM---Field House This week-chapter 17 Last class Tuesday April 5—Review +discuss exam Office hours after term ends: April 11: 3-4:30 and April 13 and April 14 from 9:30-11
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US housing-spending down
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Monetary and Fiscal Policy-makers should try to Stabilize the Economy: PRO The economy is inherently unstable, and if left unchecked, the economy will go through long and frequent periods of recession and high unemployment. With careful timing and proper actions, policy- makers can use monetary and fiscal stimulation to prevent recessions or at least minimize their severity.
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Monetary and Fiscal Policy-makers should try to Stabilize the Economy: PRO There is no reason for society to suffer through the booms and busts of the business cycle. Monetary and fiscal policy can stabilize aggregate demand and, thereby, production and employment.
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Monetary and Fiscal Policy- CON Discretionary monetary policy affects the economy with long and unpredictable (variable) lags between the “need to act” and the time that it takes for these policies to exert an influence of output and employment. Many studies indicate that changes in monetary policy have little effect on aggregate demand until about six months after the change is made.
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Monetary and Fiscal Policy-makers should try to Stabilize the Economy: CON Fiscal policy works with a lag because of the long political process to change spending and taxes. All too often these policy initiatives can aggravate rather than reduce the ups and downs of the economy. It might be desirable if policy makers could eliminate all economic fluctuations, but this is not a realistic goal. Instead provide stable environment.
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Policy question Would you be more likely to support active stabilization policy if wages, prices, and expectations adjust quickly in response to economic changes, or if they adjust slowly?
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Refers to AD and AS adjustments If wages, prices, and expectations adjust slowly, it will take longer for the economy to return to its natural rates of output and employment. In that case, there’s a better chance that expansionary policy will act in time to alleviate the recession, rather than push the economy into an inflationary boom.
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From SRAS, Y deviates from Y N when P deviates from P E . Y
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Econ- Chap 17 - x Monetary and Fiscal Policy-makers should...

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