/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q:2 鈥淭he Lucas critique by itself ... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 25: Q:2 (page 675)

鈥淭he Lucas critique by itself casts doubt on the ability of discretionary stabilization policy to be beneficial.鈥� Is this statement true, false, or uncertain? Explain your answer

Short Answer

Expert verified

The statement is true. This is because the non-rational expectations regarding the economic models impacted the stabilization policy.

Step by step solution

01

Step:1  Introduction

In a 1976 article, prominent economist Robert Lucas described how macroeconomic models might be exploited to evaluate changes in economic policy. Lucas' critique is the name given to this piece.

02

Step:2 Explanation

The Lucas critique in Economics indicates to us the effect that will be carried upon the policy of price inflation and also that the outputs will be depending on the expectations that will help us make the economic policy more effective.

Non-rational expectations econometric models disregard the impact of changing expectations, making them unreliable for evaluating policy options. According to the Lucas critique, the impact of policy on inflation and output is influenced by expectations, making it more difficult to design a helpful policy.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

How is constrained discretion different from discretion in monetary policy? How are the outcomes of these policies likely to differ?

Various survey-based measures of inflation expectations are available reflecting consumer, market, and economists" outlooks. For instance, the Survey of Professional Forecasters (SPF) is available from the Philadelphia Federal Reserve at https//www.philadelphiafed.org/research-and-data/ real-time-center/survey-of-professional-forecasters/, while the well-known University of Michigan consumer inflation expectations survey is available at https://fred st1ouisfed org/series/MICH. Compare the most recent readings of inflation expectations of the SPF and Michigan survey to actual CPI inflation. In general, which one seems to be more accurate?

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year Ago, " and download the data. Beginning in January 2012, the Fed formally announced a 2% inflation goal over the "longer-term."

a. Calculate the average inflation rate over the last four and the last eight quarters of data available. How does it compare to the2% inflation goal?

b. What, if anything, does your answer to part (a) imply about Federal Reserve credibility?

Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country's central bank affect the speed of adjustment of the aggregate supply curve to policy announcements? How does this result affect output stability? Use an aggregate supply and demand diagram to demonstrate.

If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 5%, but the Fed does not go through with this policy change, what will happen to long-term interest rates? Explain your answer.
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.