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Chapter 24: Q. 12 (page 655)

Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?

Short Answer

Expert verified

It is easier to handle problems with monetary policy.

Step by step solution

01

Step 1. Introduction

The framework established by the central bank in order to accomplish economic growth and stabilise the country's economy is known as monetary policy.

02

Step 2. Explanation

Because it is easier to handle problems with monetary policy than with fiscal policy, stabilisation policies are typically performed via monetary policy. The fiscal policy necessitates modifications to the present tax system and government spending, as well as a lengthier implementation period.

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Most popular questions from this chapter

The Problems update with real-time data in MyLab Economics and are available for practice or instructor assignment. 1. On January 19, 2017, the Federal Reserve released its amended statement on longer-run goals and monetary policy strategy. It stated: 鈥淭he Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve鈥檚 statutory mandate鈥� and that 鈥渢he median of FOMC participants鈥� estimates of the longer-run normal rate of unemployment was 4.8 percent.鈥� Assume this statement implies that the natural rate of unemployment is believed to be 4.8%. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), real GDP (GDPC1), and real potential gross domestic product (GDPPOT), an estimate of potential GDP. For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago.鈥� Download the data into a spreadsheet.

  1. For the most recent four quarters of data available, calculate the average inflation gap using the 2% target referenced by the Fed. Calculate this value as the average of the inflation gaps over the four quarters.
  2. For the most recent four quarters of data available, calculate the average output gap using the GDP measure and the potential GDP estimate. Calculate the gap as the percentage deviation of output from the potential level of output. Calculate the average value over the most recent four quarters of data available.
  3. For the most recent 12 months of data available, calculate the average unemployment gap, using 5.6% as the presumed natural rate of unemployment. Based on your answers to parts (a) through (c), does the divine coincidence apply to the current economic situation? Why or why not? What does your answer imply about the sources of shocks that have impacted the current economy? Briefly explain.

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?

Activists regard the self-correcting mechanism, which works through wage and price adjustment, as very slow and hence feel that the government should pursue active, accommodating policy to address high unemployment when it develops. Nonactivists, by contrast, believe that the self-correcting mechanism works quickly and therefore advocate that the government should avoid the implementation of active policies aimed at eliminating unemployment.

What does it mean when we say that the inflation gap is negative?

During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Fed鈥檚 plan work?
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