Chapter 18/19

Question 1

Inside Lag

Answer 1

Time between a shock to the economy and the policy action responding to that shock
-lag occurs because it takes time for policymakers first to recognize that a shock has occurred and then put appropriate policies into place

Question 2

Outside Lag

Answer 2

Time between a policy action and its influence on the economy
-lag occurs because policies don’t immediately influence spending, income and employment

Question 3

Automatic Stabilizers

Answer 3

Policies designed to reduce the lags associated with stabilization policy

Question 4

Lucas Critique

Answer 4

The criticism of traditional methods of policy evaluation

-Leaves us with two lessons (Narrow and Broad)

Question 5

Political Business Cycle

Answer 5

Manipulation of the economy for electoral gain

Question 6

Time Inconsistency

Answer 6

A case for rules over discretion arises from the problem of time inconsistency of policy

Question 7

Monetarists

Answer 7

Economists that advocate that the FED keep the money supply growing at a steady rate

Question 8

Inflation Targeting

Answer 8

Policy rule where the FED would announce a target for the inflation rate (usually a low one) and then adjust the money supply when the actual inflation rate deviates from the target

Question 9

Capital Budgeting

Answer 9

A budget procedure that accounts for assets as well as liabilities

Question 10

Ricardian equivalence

Answer 10

A view where consumers are forward-looking and base their spending decisions not only on their current income, but future income too

Question 11

Cyclically Adjusted Budget Deficit

Answer 11

Based on estimates of what government spending and tax revenue would be if the economy were operating at its natural level of output and employment