Describe the problems associated with practicing countercyclical policy
One problem is identifying where on the cycle's phase the economy is, and what path it is following. If a
phase is ending, intervening may exacerbate problems associated with the phase that is just beginning. (For
instance, countercyclical policy to fight a recession can create inflation in a boom.) Another problem is
deciding how much countercyclical policy to use in order to avoid overkill or underkill. The existence of an
administrative lag, that is, the time interval between deciding on an appropriate action and the execution of
that policy, can also undermine the effectiveness of countercyclical policy. The longer this lag, the less
effective the countercyclical policy may be due to changes in the economy's position on the business cycle.
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If the typical firm in a perfectly competitive market was depicted in the graph below, what would be most likely to occur?
A. New firms would be likely to enter, increasing the market price. B. New firms would be likely to enter, decreasing the market price. C. Existing firms would be likely to exit, increasing the market price. D. Existing firms would be likely to exit, decreasing the market price.
Automatic stabilizers do not include
a. taxes b. interest rates c. transfer payments d. forward-looking behavior e. enhancing the multiplier effect