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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

Why do temporary negative supply shocks pose a dilemma for policymakers?

鈥淚f autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.鈥� Is this statement true, false, or uncertain? Explain your answer

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 that f is determined by two factors: financial panic and asset purchases.

  1. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below the zero lower bound and into a destabilizing deflationary spiral.
  2. Using an MP curve and an AS/AD graph, show how a sufficient amount of asset purchases can reverse the effects of the financial panic depicted in part (a).

For aggregate demand shocks and permanent supply shocks, the price stability and economic activity stability objectives are consistent: Stabilizing inflation stabilizes economic activity, even in the short run. For temporary supply shocks, however, there is a trade-off between stabilizing inflation and stabilizing economic activity in the short run. In the long run, however, there is no conflict between stabilizing inflation and stabilizing economic activity.
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