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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

Suppose that people who previously had held jobs become structurally unemployed due to establishment of new government regulations during a period in which the inflation rate remains unchanged. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

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?

Would a U6 version of the natural unemployment rate likely be higher or lower than the traditional natural unemployment rate? Explain your reasoning.

The policy relevance of new Keynesian inflation dynamics based on the theory of small menu costs and sticky prices depends on the exploitability of the implied relationship between inflation and real GDP. Explain in your own words why the average time between price adjustments by firms is a crucial determinant of whether policymakers can actively exploit this relationship to try to stabilize real GDP.

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.
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