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Chapter 24: Q. 10 (page 655)

The fact that it takes a long time for firms to get new plants and equipment up and running is an illustration of what policy problem?

Short Answer

Expert verified

The policy problem is that if there will be any change in the policies then it will take time to get its real impact on economy.

Step by step solution

01

Introduction

Effectiveness is defined as the degree to which objectives are met and specific issues are resolved.

02

Step 2. Explanation

The policy dilemma associated with the assumption that it takes a long time for a corporation to get its plants and equipment up and operating illustrates a lag in the firm's effectiveness. The requirements of an organisation must be realised and then accessed in a series of processes. The ineffectiveness in moving in the desired direction is a result of the lack of effectiveness in moving in the desired direction, as any change in policy takes time to have a substantial influence on the economy.

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Most popular questions from this chapter

If an economy鈥檚 self-correcting mechanism works slowly, should the government necessarily pursue an activist policy to eliminate unemployment? Why or why not?

Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.

  1. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output.
  2. What will be the effect on the real interest rate, the inflation rate, and the output level if the Federal Reserve decides to stabilize the inflation rate?

. Why do activists believe that the economy鈥檚 selfcorrecting mechanism works slowly?

In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a 鈥渟oft patch鈥� in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary.

  1. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession?
  2. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.

Suppose three economies are hit with the same temporary negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country B, inflation initially rises and output falls; then both inflation and output fall. In country C, inflation initially rises and output falls; then inflation falls and output eventually increases. What type of stabilization approach did each country take?
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