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Chapter 16 17 Demand Management Policies Fiscal Policy Debt summary (FEB11002 Macro-economie)
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English summary of chapter 16 and 17 of the book Burda & Wyplosz.
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Chapter 16: Demand Management Policies2. Demand Management: What are the Issues?
The speed at which the AS curve shifts depends on the relative importance of the forward-
looking component of underlying inflation.
Rational expectations = people do not make systematic errors. They may occasionally
underestimate future inflation, and then overestimate it, but on average they get it right.
3. Feasible Demand Management Policy
Economists’ initial optimism about demand management policy was driven by a belief that
the economy was more or less deterministic, meaning that the present depends
mechanically on the economic history of the past.
Macroeconomic policy must contend with a number of lags.
>A recognition lag hinders policy-maker’s ability to intervene effectively. This is simply the
time needed to discover that some policy intervention is required.
>Governments need time to formulate policy. This is called the decision lag, and is
associated with the details of parliamentary democracies.
>Depending on the government structure, this can be coupled with an implementation lag,
as ministries must originate, and parliaments must pass, legislation.
>Effectiveness lag. How long it takes to see the impact on real activity.
According to the Friedman critique, ill-timed policy interventions may actually worsen the
cycle. Under the best of circumstances, there is no guarantee that policies will be
implemented in time, or achieve the stated objectives.
Look at figure 16.8 on page 417.
Automatic stabilizers slow an economy down in a boom phase and stimulate it in recessions.
They need little or no political decisions and can thus evade the political wrangling that may
impart a decision lag on an otherwise well-informed government.
The partisan business cycle view predicts that change so party in power result in policy
changes that generate their own cycles.
4. Sources of Business Cycle Fluctuations and the Future of Demand Management Policies
Demand shocks are characterized by rising output relative to trend and increasing inflation,
while supply shocks see output and inflation moving in opposite directions.
Chapter 17: Fiscal Policy, Debt, and Seigniorage
Two economic functions of governments:
The microeconomic function, which includes the provision of public goods and services and
income redistribution, and the macroeconomic function, which aims at stabilizing aggregate
activity.
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