Describe the policy ineffectiveness proposition (PIP). Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold
The PIP is associated with the new classical theory. The new classical theorists hold that under certain assumptions, neither expansionary fiscal policy not expansionary monetary policy is effective at increasing Real GDP and lowering the unemployment rate in the short run. The assumptions that are required to support PIP are (1 ) the expansionary policy change is correctly anticipated, (2 ) individuals form their expectations rationally, and (3 ) wages and prices are flexible.
You might also like to view...
One characteristic of a financial crisis caused by macroeconomic imbalances is that it
A) may or may not be predictable. B) will occur eventually even though its timing is unpredictable. C) may be caused by expansionary fiscal policies accompanied by high budget deficits. D) may be caused by high deficits financed by increases in the money supply. E) All of the above.
If workers and employers agree to a three-year wage contract under the expectation of 5 percent inflation, and inflation turns out to be 3 percent, then:
A. workers lose and employers gain. B. workers lose and employers lose. C. workers gain and employers gain. D. workers gain and employers lose.