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Chapter 15: Problem 3

Which of the following events would strengthen the argument for the use of discretionary policy, and which would strengthen the argument for rules? a. Structural changes make the economy's self-correcting mechanism work more quickly and reliably than before. b. New statistical methods are found that improve the accuracy of economic forecasts. c. A Democratic Congress is elected when there is a Republican president. Congress and the president differ sharply on what should be done about the national economy.

Short Answer

Expert verified
Answer: a) In the case of structural changes that improve the economy's self-correcting mechanism, the argument for the use of rules strengthens, as they allow economic imbalances to be corrected without discretionary intervention. b) Improved economic forecasts strengthen the argument for discretionary policies, as policymakers can make better-informed decisions. c) Significant political differences between Congress and the president strengthen the argument for rules, as they can reduce delays in policy implementation and minimize political biases in economic decision-making.

Step by step solution

01

Situation a: Structural changes in the economy

If structural changes make the economy's self-correcting mechanism work more quickly and reliably than before, it would strengthen the argument for the use of rules. This is because a more efficient self-correcting mechanism means that economic imbalances can be corrected without the need for discretionary intervention from policymakers. Therefore, relying on predetermined rules, rather than case-by-case judgment, becomes a more attractive option in such a situation.
02

Situation b: Improved economic forecasts

If new statistical methods are found that improve the accuracy of economic forecasts, the argument for the use of discretionary policy strengthens. This is because better forecasts enable policymakers to take timely and well-informed decisions by assessing the current and future state of the economy more accurately. In this case, discretionary policy becomes more effective, as policymakers are better equipped to respond to economic shocks and imbalances.
03

Situation c: Political differences between Congress and the president

If there are significant political differences between a Democratic Congress and a Republican president about the economy, the argument for rules strengthens. These differences can lead to delays in policymaking and the implementation of economic policies. Furthermore, discretionary policy can become subject to political biases, which can be detrimental to the economy. In such cases, relying on predetermined rules could provide a more stable and predictable environment for economic decision-making, as they reduce the room for political interference.

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Most popular questions from this chapter

The money supply \((M)\) is the sum of bank deposits \((D)\) plus currency in the hands of the public (call that \(C\) ). Suppose the required reserve ratio is 20 percent and the Fed provides 50 billion in bank reserves \((R=\$ 50\) billion \()\) a. First assume that people hold no currency (C=0). How large will the money supply (M) be? If the Fed increases bank reserves to R=60 billion, how large will M be then? b. Next, assume that people hold 20 cents worth of currency for each dollar of bank deposits; that is, C=0.2 D . Define the monetary base (B) as the sum of bank reserves (R) plus currency: B=R+C. If the Fed now creates 50 billion worth of monetary base, how large will M be? (Hint: You will need a little bit of algebra to figure this out. Remember that the 50 billion monetary base is divided between two purposes: bank reserves and currency.) Now, if the Fed increases the monetary base to B= 60 billion, how large will M be? c. What do you notice about the relationship between M and B?
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