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.
You might also like to view...
If expectations are rational, the difference between the actual inflation rate and the forecast for inflation is: a. positive when inflation is increasing
b. negative when inflation is increasing. c. random. d. greater, the more accurately people anticipate the effects of government policy.
?If a positive externality results from the consumption of higher education, then the marginal benefit students receive from education:
a. equals the marginal social benefit
b. is less than the marginal social benefit.
c. includes the marginal external benefit.
d. exceeds the marginal social benefit.