Suppose that the goal of the fiscal authority is to set government spending so as to achieve economic efficiency, while the goal of the monetary authority is to achieve stability of the price level over the long run. Assume that the economy is initially in equilibrium and that there is then a temporary decrease in total factor productivity. Show that there are many ways in which the fiscal and monetary authority can achieve their separate goals. What could determine what fiscal and monetary policy settings are actually used in this context? Discuss.
Answer to relevant QuestionsSome macroeconomists have argued that it would be beneficial for the government to run a deficit when the economy is in a recession, and a surplus during a boom. Does this make sense? Carefully explain why or why not, using ...Suppose that consumption expenditures and investment expenditures are very inelastic with respect to the real interest rate. What does this imply about the power of monetary policy relative to fiscal policy in closing a ...Suppose, in the second model in this chapter, with production and investment, that there is an increase in credit market frictions, as studied in Chapter. What are the effects on aggregate output and the current account ...Suppose that capital controls take the form of a total ban on capital inflows, but all capital outflows are permitted. Also suppose that initially the current account surplus is zero. Determine the effects of a temporary ...Suppose that there are shocks total factor productivity which cause aggregate output to fluctuate. What does this imply for the Friedman rule, that is, how should the central bank conduct monetary policy optimally? Discuss.
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