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Chapter 24: Q. 13 (page 655)

鈥淚f the data and recognition lags could be reduced, activist policy probably would be more beneficial to the economy.鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The assertion is valid because a shift in the aggregate demand curve will arise from a shorter data lag and recognition lag.

Step by step solution

01

Step 1. Introduction

Aggregate demand is the economy's total overall demand for final goods and services at any one time.

02

Step 2. Explanation

The statement is correct because the shorter data lag and recognition lag will result in a shift in the aggregate demand curve, allowing aggressive policies to quickly bring the economy to full employment. The time required to collect data and decide on the economy's future course of action will be reduced when the time span of lags decreases.

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Most popular questions from this chapter

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?

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?

鈥淧olicymakers would never respond by stabilizing output in response to a temporary positive supply shock.鈥� Is this statement true, false, or uncertain? Explain your answer.

How can demand-pull inflation lead to cost-push inflation?

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.
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