W9P3 - Notebooklm Flashcards
What is the central question of the traditional debate discussed in the lecture?
Should the government engage in any kind of fiscal policy to try to smooth the business cycle? Is smoothing the business cycle valuable, and can the government effectively do so?
What is the core of the traditional debate on government intervention in the business cycle?
How quickly aggregate supply (prices) is adjusting in the economy.
What is demand management?
The idea of fine-tuning aggregate demand by increasing output during a recession and reducing output during a boom to maintain the trend output level.
According to the simplified AS-AD model, what is the short-run effect of increased government spending?
A temporary increase in output.
According to the simplified AS-AD model, what is the long-run effect of increased government spending?
Output returns to the trend level, but with higher inflation. This is due to increasing inflation expectations and an upward shift in the short-run aggregate supply schedule.
What is the key difference between the Keynesian and neoclassical views on government intervention?
Keynesians believe prices adjust slowly, making intervention to recover from below-trend output beneficial. Neoclassical economists believe prices adjust quickly, so intervention mainly causes inflation with little lasting output increase.
What do neoclassical economists suggest the government should aim for?
Low inflation.
How do neoclassical economists view contractionary monetary or fiscal policy to reduce inflation?
As relatively painless because prices and inflation expectations will adjust quickly, and the short-run aggregate supply will shift downwards rapidly.
What is the Keynesian view on being below the trend output level for a long time?
It is painful, and therefore, expansionary monetary or fiscal policy should be used to shift the aggregate demand schedule to the right and return to the trend output level.
What is a point of agreement between Keynesian and neoclassical economists regarding price adjustment?
Prices are not adjusting instantaneously.
What is the core idea of rational expectations?
Economic agents are forward-looking and can adjust their expectations quickly based on new information, rather than solely relying on past values.
How did rational expectations challenge the traditional Keynesian view?
It moved away from the backward-looking view of expectation formation in traditional Keynesian theory.
What are nominal rigidities?
Situations where prices cannot change instantaneously due to contractual commitments or other factors. Examples include fixed-price mobile phone or energy contracts.
How do nominal rigidities affect price adjustments even with rational expectations?
Even if agents have flexible and forward-looking expectations, prices may still adjust slowly due to pre-existing contracts that prevent immediate changes.
What does a hybrid Philips curve suggest about current inflation?
It depends not only on inflation expectations and the output gap but also on past inflation values. The parameter alpha controls the weight given to forward-looking versus backward-looking factors.
What would the neoclassical Real Business Cycle (RBC) theory suggest about long-term unemployment fluctuations?
That all fluctuations in output and unemployment are just voluntary and caused by supply shocks.
What does long-term UK unemployment data suggest about the causes of unemployment?
There appear to be long and persistent deviations from the long-term average of unemployment, suggesting that factors beyond short-run supply shocks, such as long-run demand shocks, are also at play.
Even if nominal rigidities exist, why do neoclassical economists question the effectiveness of fiscal policy?
Due to significant policy lags (recognition lag, implementation lag, effectiveness lag) and uncertainty about the underlying problem in the economy.
What is the recognition lag in fiscal policy?
The time it takes to actually understand the underlying problem causing a decline in output or an increase in unemployment.
What is the effectiveness lag in monetary or fiscal policy?
The time it takes for the implemented policy to actually stimulate the level of investment and output in the economy.
According to neoclassical economists, what is a potential negative consequence of poorly timed fiscal policy?
It might amplify the business cycle instead of smoothing it if the policy takes effect when the economy is already in a boom.
Why are good leading indicators of the economy important?
To allow policymakers to anticipate economic changes and implement timely and potentially more effective policy responses.
What topics will be covered in part four of the lecture?
The implications of rational expectations, including Ricardian equivalence, the Lucas critique, and time inconsistency.
