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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

The real-business-cycle approach attributes even short-run increases in real GDP largely to aggregate supply shocks. Rightward shifts in aggregate supply tend to push down the equilibrium price level. How could the real-business-cycle perspective explain the low but persistent inflation that the United States experienced until 2007?

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

aHow 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 policymaking? Why might the government wish to make such a change?

People called "Fed watchers" earn their living by trying to forecast what policies the Federal Reserve will implement within the next few weeks and months. Suppose that Fed watchers discover that the current group of Fed officials is following very systematic and predictable policies intended to reduce the unemployment rate. The Fed watchers then sell this information to firms, unions, and others in the private sector. If pure competition prevails, prices and wages are flexible, and people form rational expectations, are the Fed's policies enacted after the information sale likely to have their intended effects on the unemployment rate?

Consider Figure 17-5, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. In the long run, will an increase in the inflation rate to 3percent result in the economy operating at point Bor at point F1? Explain your reasoning.

Explain whether the cyclical unemployment rate is positive, zero, or negative at the point E2, after the shift in the aggregate demand curve from AD1to AD2. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at a point E3, following the shift in the short-run aggregate supply curve from SRAS, toSRAS.
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