If most business cycles are due to inflation shocks, then why is this an argument for passive policy set by rules and not active policy set by discretion?
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If most business cycles are due to inflation shocks, then why is this an argument for passive policy set by rules and not active policy set by discretion?
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- Why do temporary negative supply shocks pose adilemma for policymakers?Explain why a supply shocks is most of the time believed to be temporary? And does not result in government requiring to do any special policy to rectify the problem.In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?
- Which perspective is better suited to handling the inflation we face today? Keynesian or Neoclassical? Explain why.What is, according to Keynes, the role of expectations in stabilizing or destabilizing the aggregate demand? Write the chain of argument which explains the phenomenon?When aggregate output is below the natural rate of output, what happens to the inflation rate over time if theaggregate demand curve remains unchanged? Why?
- Consider a standard AD-AS model. If the central bank responds relatively aggressively to inflation being below target, temporary supply shocks have relatively little effect on output. True/False. Remember to include your explanation.in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?Discuss whether it is possible for policymakers to trade off more inflation for higher output in the short run and the long run. Explain from the new classical and new Keynesian perspective.
- what is the mean by the "time inconsistency"of economic policy? why might policymakers be tempted to renege on an annoucement they made earlier ? in this situation, what is the advantage of a policy rule? explain how it might arise in the case of the short run trade off between inflation and unemployement?Why is it so difficult to "fine-tune" the American economy using discretionary macroeconomic policy? a) To be effective in stabilizing the economy, the impact of macroeconomic policy must be well timed, else the policy might instead destabilize the economy. b) Often it takes months for economists to recognize the macroeconomy's major shift in direction. c) Expansionary monetary policy depends on the willingness of banks to lend to people willing to borrow, and in a recession people may be reticent to borrow and banks to lend. d) In the American political system it is very difficult to pass any legislation quickly, and fiscal policy usually involves significant political trade-offs. e) All of the aboveWhat role, if any, does monetary policy play in the Real Business Cycle Model?