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Chapter 24: Q. 16 (page 655)

Suppose that welfare gains derived from eliminating output (and unemployment) fluctuations in the economy can be measured. Assuming these gains are relatively small for the average individual, how do you think this measurement would affect the activist/ nonactivist debate?

Short Answer

Expert verified

Government policies provide greater and larger welfare improvements than activist-led efforts.

Step by step solution

01

Step 1. Introduction

An activist is a person or a group of people who organise operations in attempt to effect various economic or political changes.

The welfare gain in the economy occurs when an economy benefits from an increase or decrease in the consumption and production capacities of its citizens.

02

Step 2. Explanation

According to the beliefs of Robert Lucas, a well-known economist, an economy reacts to numerous changes made in the name of stabilisation in the long run rather than the short run. As a result, activist stabilisation is a part of the short-term advantages that an economy may experience, but in the long run, the government's monetary and fiscal policies serve to stabilise general economic swings.

As a result, government policies provide greater and larger welfare improvements than activist-led efforts.

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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?

Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fluctuations in output and inflation.

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).

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.

Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
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