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Chapter 28: Problem 6

In an article in Forbes, Paul Roderick Gregory, an economist at the University of Houston, commented on the use of monetary policy to fight a recession: "Those who devise stimulus programs must know in advance the extent to which households and businesses will correctly anticipate the policy. A policy that has been used \(x\) times in the past is unlikely to have a stimulative effect because it will be easily anticipated." Does Gregory believe that households and businesses have adaptive expectations or rational expectations regarding monetary policy? Briefly explain.

Short Answer

Expert verified
Paul Roderick Gregory believes that households and businesses have adaptive expectations regarding monetary policy. This is inferred from his statement about households and businesses being likely to anticipate a policy that has been used multiple times in the past.

Step by step solution

01

Consider the Economist's Statement

Observing Paul Roderick Gregory's comments, he mentioned that if a policy has been used 'x' times in the past, households and businesses are likely to anticipate this. The important aspect is that he states people anticipate policy changes based on past occurrences.
02

Match the Statement to a Theory

He seems to suggest that households and businesses create expectations based on previous policy decisions. This matches with the idea of adaptive expectations.
03

Forming a Conclusion

Paul Roderick Gregory's statements suggest he believes households and businesses have adaptive expectations rather than rational expectations. Under adaptive expectations, people form future expectations based solely on past trends and experiences, which aligns with what Paul Roderick Gregory stated about policy anticipation.

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Most popular questions from this chapter

An opinion column in the Wall Street Journal noted, "In a democracy, the tradeoff for a central bank's independence is accountability to the nation's elected leadership." a. Why would a country want to grant its central bank more independence than it grants, say, its department of agriculture or department of education? b. In the United States, how is the Fed held accountable to the nation's elected leadership? Source: David Wessel, "Explaining 'Audit the Fed," Wall Street Journal, February 17, 2015 .

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