Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Nouriel Roubini wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Steady-state economy wikipedia , lookup
Economics of fascism wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
American School (economics) wikipedia , lookup
Monetary policy wikipedia , lookup
Economy of Italy under fascism wikipedia , lookup
Chapter 15 -Economic Policy This chapter -- looks at Economic Policy, overt intervention taken to improve a economy currently operating with problems. Economic Policy -- “medicine” given to cure a “sick” economy. Emphasizes Fluctuations Strategy, Get Y* closer to a given YF. Diagnosing the Economy -A Quick Review Y < YF -- sluggish economy Y > YF -- economy with accelerating inflation Y = YF -- economy with constant inflation rate (desired state) Strategies for (Fluctuations) Economic Policy Expansionary Policy -- Policy designed to address a sluggish economy (Y* < YF). Contractionary Policy -- Policy designed to address an overstimulated, or accelerated inflation economy (Y* > YF). Types of Economic Policy Monetary Policy -- The Federal Reserve changing the supply of financial capital to promote investment (and possibly durable goods consumption). Fiscal Policy – The Federal Government changing the government budget position (G-T). Trade Policy -- Trying to managing the economy though changing exports (X) and imports (M). The Intent and Method of Economic Policy Intent -- to move Y* closer to YF. Expansionary Policy (policy for Y* < YF), seeks to increase spending on goods and services, or shift the AD curve rightward. Contractionary Policy (policy for Y* > YF), seeks to decrease spending on goods and services, or shift the AD curve leftward. Challenges to Using Economic Policy (1) Can the economy cure itself instead? (2) Avoiding excessive expansion and the wage-price spiral. (3) Reacting to adverse supply shocks. Challenge #1 -- Can The Economy Cure Itself? Short-Run Perspective (equilibrium in AD-AS model): Y* does not necessarily equal YF due to market failure in the labor market. Therefore, the economy needs policy (interventionist position). Long-Run Perspective (equilibrium in AD-LAS model): Y* = YF because the “nice assumptions” are satisfied and the economy is at GCE. Therefore, it can cure itself and there is no need for policy (non-interventionist position). The Long-Run: A Graphical Description Let’s return to the Labor Market -the demand and supply for labor employment. In this case, let’s consider the Aggregate Labor Market, or the total demand and supply for labor. Labor Market Equilibrium and the Economy Labor Market Equilibrium (N*) -where labor demand equals labor supply across the economy. At N*, there is no demanddeficient unemployment. So at N*, Y* = YF and u = uN. The Economy Curing Itself in the The Long-Run Example 1 -- sluggishness (Y < YF), and correspondingly, demand-deficient unemployment. Problem -- wage rate (W) is too high. Solution -- allow W to decrease, until N = N*. When that occurs, simultaneously Y* = YF. The Economy Curing Itself in the The Long-Run Example 2 -- accelerating inflation (Y > YF), and correspondingly, having u < uN. Problem -- wage rate (W) is too low. Solution -- allow W to increase, until N = N*. When that occurs, simultaneously Y* = YF. The Economy in the The Short-Run (Market Failure) Example 1 -- sluggishness (Y* < YF), and correspondingly, demand-deficient unemployment. Problem -- W is too high. Key -- W does not decrease due to market failure (e.g. labor contracts). Therefore, Y* stays less than YF. Problem persists without policy. The Economy in the The Short-Run (Market Failure) Example 2 – overstimulated, accelerating inflation economy (Y* > YF). Problem -- W is too low. Key -- W does not increase due to market failure (e.g. labor contracts). Therefore, Y* stays greater than YF. Problem persists without overt policy. Why Do We Call For Policy? The Relevant Short-Run John Maynard Keynes’ famous quote. The Great Depression and the Employment Act of 1946. The 1992 election -- (George H.W.) Bush versus Clinton. Policy successes -Volcker (1980s) and Greenspan (1991-2000). Challenge #2 -- Avoiding the Wage-Price Spiral US -- Late 1960s-Early 1970s. Excessive demand policy -- shifts the AD curve rightward too far, Y* > YF, accelerates inflation, increases inflation expectations. Labor seeks above-normal increases in nominal wage rates (W) to protect themselves, AS curve shifts leftward. The Wage-Price Spiral, Continued As a result, Y* returns to previous level, call for further expansionary policy. Process keeps repeating itself. Avoiding the Wage-Price Spiral Use expansionary policy judiciously. Be careful of overshooting where Y* exceeds YF, don’t arouse inflation fears. Be watchful for nominal wage rate increases when deciding to use policy. Refrain from expansionary policy if nominal wage increases are larger than normal. Challenge #3 -- Reacting to Adverse Supply Shocks Most dramatic US Experiences -- 1973 and 1978. Adverse supply shock -- large increase in the price of energy (PE), shifts AS curve leftward. As a result, Y* decreases and P* increases. Both represent problems in the economy. Reacting to Adverse Supply Shocks -- Lessons Learned. Don’t react -- standard policy will not help the situation. Calls for alternative strategy, such as energy policy. Or wait it out – inherent instability of cartels. Examining the Different Types of Economic Policy Monetary Policy Fiscal Policy Trade Policy -- Chapter 16. -- Chapter 17. -- Chapter 18.