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8 Cards in this Set
- Front
- Back
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Assume a country has presidential elections every three years. If a political business cycle exists in this country, explain any differences in the average annual growth rates of output for each year of a typical administration |
There would be increased growth before an election and decreased growth after the election. So growth would be higher before an election every 3 years as opposed to every 4 years. |
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First, what can be done to increase central bank credibility? |
- Make the central bank independent. This way they can resist political pressure to decrease unemployment by increasing money growth. - Give incentives to the central banker to take the long-term view; that is, to take into account the long-run costs of higher inflation. - Choose a conservative central banker, i.e., one who dislikes inflation |
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Second, why is central bank credibility important? |
B/c credibility helps control inflation. It allows the central bank to try to control inflation/unemployment better. If wage-setters trust the central bank and set wages with the announced rate of inflation from the fed, inflation and unemployment can be kept in check |
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Discuss the time inconsistency problem and explain how it relates to monetary policy. |
It is incentive to deviate from an announced policy after the other player has made their move. With a lot of time inconsistency, you are likely to see high inflation b/c controllers of monetary policy based on what other players will do. |
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Balanced budget amendments are believed to be destabilizing. Explain why this is so. |
B/c they do not use fiscal policy which is infeasible for long term stability. |
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Suppose a government implements rule that result in a more independent central bank. What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain. |
A more independent central bank would hopefully lead to controlled and steady rate of money growth inflation, if they maintain credibility. If the fed is credible and independent than they wouldn't have much issue keeping money growth and inflation constant as wage setters would believe them and they would take into account long term growth and inflation. |
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What are the main rules of the Budget Enforcement Act of 1990? |
1. It imposed constraints on spending. Constraints, called spending caps, were set on discretionary spending for a period of 5 years. 2. It required that a new transfer program could only be adopted if it could be shown not to increase deficits in the future. This rule is known as the "pay-as-you-go" or the PAYGO rule. |
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Use the concept of "wars of attrition" to explain the debate about deficit reduction. |
Parties debating about deficit reduction will simply hold out against each other until the debt is too large to ignore and one side must be chosen. |
