B5 Flashcards
What are the two broad views on how fiscal and monetary policymakers should respond to the business cycle?
- The economy is inherently unstable and requires government intervention to offset fluctuations.
- The economy is inherently stable and government intervention interferes with the natural balancing process.
According to the view that the economy is inherently unstable, what role should the government play?
The government should intervene from time to time to offset economic fluctuations, such as shocks, through fiscal and monetary policies.
What is the main belief of those who think the economy is inherently stable regarding government intervention?
They believe that government intervention only interferes with the natural balancing process of the economy and can potentially exacerbate existing fluctuations.
What are fiscal policies?
Fiscal policies involve government spending and tax policies designed to influence economic conditions, including demand, employment, and inflation.
What are monetary policies?
Monetary policies involve the management of the money supply and interest rates by central banks to control inflation, manage employment levels, and stabilize the currency.
Do fluctuations in output and unemployment impose welfare losses on society?
Yes, fluctuations in output and unemployment can impose welfare losses on society, affecting economic stability and individual well-being.
What are the two approaches to managing economic fluctuations?
The two approaches are:
- Active approaches, which involve regular and intentional government intervention.
- Passive approaches, which rely on minimal government intervention and let the economy self-correct.
What is the difference between ‘rules’ and ‘discretion’ in government policy?
‘Rules’ involve following predefined guidelines for economic policy, while ‘discretion’ allows policymakers to make decisions case-by-case based on current economic conditions.
Can ‘rules’ be ‘active’ or ‘passive’?
Yes, ‘rules’ can be either ‘active’ or ‘passive.’ Active rules involve systematic interventions based on economic indicators, while passive rules involve limited or no intervention.
How is ‘discretion’ almost certainly classified in terms of economic policy?
Discretion is almost certainly classified as ‘active’ because it involves case-by-case decision-making to address economic fluctuations actively.
Why is the economy likened to a ship rather than a car in the context of active policy?
The economy is more like a ship because interventionist policymakers tend to ‘oversteer,’ leading to potential overcorrections and instability.
What did Friedman mean by “lags are long and variable”?
Friedman meant that there are significant and unpredictable delays between recognizing economic issues and the effects of policy interventions.
What is the inside lag in economic policy?
The inside lag is the delay between a shock hitting the economy and policymakers’ reaction, caused by factors such as information lags or legislative delays.
What is the outside lag in economic policy?
The outside lag is the delay between a policy action and its impact on the economy.
How do automatic stabilizers help shorten the inside lag?
Automatic stabilizers, like income taxes, consumption taxes, corporation taxes, and unemployment insurance, stimulate or contract the economy automatically without the need for new legislation, thus shortening the inside lag.
