Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 11, Problem 7RQ
To determine
To Explain: The alternative options available for economic policy makers in the event of an economic recession and their advantages and disadvantages.
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Why do economists often disagree about the conduct of macroeconomic stabilization policy?
For a country, economists have estimated that structural unemployment is 2.0% and
frictional unemployment is 3.0%. If total unemployment is currently 4.0%, this
suggests that:
a) The economy is in a recessionary gap, with actual output greater than
potential output.
b) The economy is in an inflationary gap, with actual output greater than
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c) There is no output gap, and actual output is equal to potential output.
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e) The economy is in an inflationary gap, with actual output less than potential
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What were the monetary and fiscal policy responses to the Great Recession? Discuss their effectiveness and how the policy contributed to GDP growth.
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- Why Keynesian economics become popular back in 1930’s. Do you think that during 2005-08 financial crisis, Keynesian 1930 solution work for the economy? Explain your answerarrow_forwardConsider an economy currently in recession. Which is NOT a policy move that could assist the economy, as discussed in class? Raising the money supply Raising government spending Lowering bank reserves Lowering interest ratesarrow_forwardA number of countries, like Greece and the United Kingdom, have in the past few years responded to growing and problematic levels of debt by introducing “austerity” policies: significant cuts to government purchases (G) combined with significant tax (T) increases. These policies have been controversial among both economists and the public. What is the long run effect of austerity on the unemployment rate?arrow_forward
- Consider the following two alternative definitions of a recession: 1.A period of negative output growth. 2.A period when the output level is below the country's potential, or normal, level. Now consider a country that has been producing a lot of oil, whose oil wells have suddenly run out. This results in both its potential, and actual, output falling. Which of the following statements are correct? The policymaker using the second definition may underreact to the slowing output. The policymaker using the first definition may underreact to the slowing output. O According to the first definition, the country is now unambiguously in a recession. O According to the second definition, the country is now unambiguously in a recession.arrow_forwardExplain in details how high inflation can lead to a recession in several ways.arrow_forwardA severe negative supply shock occurs when there is a significant reduction in the supply of key inputs, such as labor, raw materials, or energy. This can lead to a reduction in output, higher prices, and potentially stagflation (i.e., high inflation and low economic growth). To tackle the effects of a severe negative supply shock, governments and central banks may use various macroeconomic policies. Supply-side policies: Supply-side policies refer to measures aimed at increasing the productive capacity of the economy. In the case of a severe negative supply shock, the government may implement supply-side policies such as tax incentives or subsidies to encourage firms to invest in new technology or production methods. However, these policies may take time to have an impact and may not be sufficient to offset the immediate effects of the supply shock. explain this graphically please.arrow_forward
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