A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment. Discuss why this view is naïve
What will be an ideal response?
(1 ) Inflation may arise without any gain in output if the government misuses its power to print money.
(2 ) In practice, it is sometimes hard to be sure whether a disturbance to the economy originates in the output or assets markets.
(3 ) Shifts in fiscal policy often can be made only after lengthy legislative deliberations. Governments are likely to respond to disturbances by changing the monetary policy even when a shift in fiscal policy would be more appropriate.
(4 ) Fiscal policy impacts the government budget and may lead to government budget deficit that must be sooner or later be closed by a fiscal reversal. The state of the electoral cycle may be more important.
(5 ) Policies operate in reality with lags of varying length.
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Suppose your tastes over consumption and leisure have constant elasticity of substitution. I observe that, when your wage went up, you continued to work the same number of hours. From this, I can conclude that you have Cobb-Douglas tastes.
Answer the following statement true (T) or false (F)
If a financial institution extends a 25 year loan at a 6 percent interest rate, and then the inflation rate increases suddenly and unexpectedly to 6 percent per year, the institution receives on its loan a real return of
A) minus 12 percent. B) zero percent. C) 6 percent. D) 12 percent. E) 36 percent.
All of the following are in-kind benefit programs, except
A. food stamps. B. Medicaid. C. energy assistance. D. SSI.
Restricting imports
A) can protect United States jobs in the protected industry, which increases economic welfare of the country as a whole. B) can protect United States final goods and services in the protected industry and makes consumers better off. C) can protect United States final goods and services in the protected industry and increase economic welfare of the country as a whole. D) can protect United States jobs in the protected industry but will also lead to reductions in U.S. output and income.