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Chapter 17: Q. 17.4 (page 374)

Distinguish among modern approaches to active policymaking.

Short Answer

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Political and social scientists have developed numerous theories, models, and approaches for analysing policy-making. Indeed, public officials have typically shown a greater talent and enthusiasm for theorising about public policy than for studying policy and the policy-making process.

Step by step solution

01

Step :1 Introduction 

All users of disparate fields nevertheless have a common reference point. It is mostly used to describe what the government does to meet the needs of the people.

02

Step :2 Explanation 

Firms may be hesitant to modify pricing in the face of demand changes, according to new Keynesian theories. As a result, the aggregate supply curve in the short run is horizontal, and changes in aggregate demand have the greatest impact on real GDP in the short run. Discretionary policy interventions can stabilise real GDP if prices and wages are sufficiently inflexible in the short run to provide an exploitable trade-off between inflation and real GDP.

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Most popular questions from this chapter

Suppose that economists were able to use U.S. economic data to demonstrate that the rational expectations hypothesis is true. Would this be sufficient to demonstrate the validity of the policy irrelevance proposition?

Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force.

a. How would this affect the actual unemployment rate?

b. How would such a change affect estimates of the natural rate of unemployment?

c. If this computational change were made, would it in any way affect the logic of the short-run and long-run Phillips curve analysis and its implications for policy making? Why might the government wish to make such a change?

Consider a situation in which a future president has appointed Federal Reserve leaders who conduct monetary policy much more erratically than in past years. The consequence is that the quantity of money in circulation varies in a much more unsystematic and, hence, hard-to-predict manner. According to the policy irrelevance proposition, is it more or less likely that the Fed's policy actions will cause real GDP to change in the short run? Explain.

Evaluate the following statement: "In an important sense, the term policy irrelevance proposition is misleading because even if the rational expectations hypothesis is valid, economic policy actions can have significant effects on real GDP and the unemployment rate."

Explain why the actual unemployment rate might depart from its natural rate.
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