QUESTIONS FOR REVIEW

Question 18.1

1. What are the inside lag and the outside lag? Which has the longer inside lag—monetary or fiscal policy? Which has the longer outside lag? Why?

Question 18.2

2. Why would more accurate economic forecasting make it easier for policymakers to stabilize the economy? Describe two ways economists try to forecast developments in the economy.

Question 18.3

3. Describe the Lucas critique.

Question 18.4

4. How does a person’s interpretation of macroeconomic history affect his view of macroeconomic policy?

Question 18.5

5. What is meant by the “time inconsistency” of economic policy? Why might policymakers be tempted to renege on an announcement they made earlier? In this situation, what is the advantage of a policy rule?

Question 18.6

6. List three policy rules that the Fed might follow. Which of these would you advocate? Why?

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