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Chapter 17: Q. 17.5 (page 374)

Evaluate the implications of behavioral economics for macro policymaking.

Short Answer

Expert verified

Poiscy acts have long-term consequences, such as aggregate demand. Rational inattention, or the infrequent update of economic knowledge, leads to sticky product prices and slow adjustment of inflation expectations.

Step by step solution

01

Step :1 Introduction 

Policymakers and academics alike are interested in behavioural economics research. It clarifies what policymakers should be concerned about and improves the quality of our economic models. The work presented at this conference highlights some of the achievements, but it also shows that the marginal product of additional behavioural economics research will remain high.

02

Step :2 Explanation 

The justification for activist policymaking is strengthened by bounded rationality.

Habit formation in househoids can allow future desired real consumption spending to be influenced by previous consumption. Poiscy acts, as a result, have longer-term effects on aggregate demand.

Rational inattention, or the infrequent update of economic knowledge, causes sticky product prices and slow adjustment of inflation expectations.

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Most popular questions from this chapter

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."

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?

The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. Make lists of possible factors affecting workers and firms that you believe are likely to influence the natural rate of unemployment.

Suppose that people who previously had held jobs become cyclically unemployed at the same time the inflation rate declines. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

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?
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