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Unformatted text preview: 1 20-1 Macroeconomic Policy and Aggregate Demand and Supply Analysis, Part 1 20-2 Agenda 1. The Objectives of Macroeconomic Policy 2. Stabilizing Inflation and Economic Activity a. Demand Shocks b. Permanent Supply Shocks 20-3 The Objectives of Macroeconomic Policy • Macroeconomic policy has 2 main objectives: 1. Stabilizing output around potential output, and 2. Stabilizing inflation at a low level. • Policies to achieve these objectives are called stabilization policies . 20-4 The Objectives of Macroeconomic Policy • Stabilization policies primarily involve: 1. The government, i.e., fiscal policy , and 2. The central bank, i.e., monetary policy . • However, in most economies, the principle responsibility for stabilization policy lies with the central bank and monetary policy . 2 20-5 The Goal of Stabilizing Economic Output • A goal of stabilizing economic output around potential output will also stabilize the unemployment rate around the natural rate of unemployment. – That is, when Y t ≈ Y P , then U t ≈ U N . – Alternatively, maximum sustainable employment has been achieved. 20-6 The Goal of Stabilizing Economic Output • A zero unemployment rate is both unattainable and undesirable because of both: 1. Frictional unemployment , and 2. Structural unemployment. 20-7 The Goal of Stabilizing Economic Output • Unemployment is central to stabilization policy because: 1. High unemployment involves substantial personal suffering for the unemployed, and 2. High unemployment leaves labor and capital resources idle, reducing economic output....
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This note was uploaded on 03/13/2012 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.
- Fall '08