If the self-correcting mechanisms of market economies work slowly, then: A. discretionary fiscal policy is likely to do more harm than good. B. discretionary monetary policy is likely to do more harm than good. C. periods when the unemployment rate exceeds the economy’s natural unemployment rate will be brief. D. policy makers may be able to help stabilize the economy through the use of discretionary macroeconomic policies.
A? May over-correct, given slow nature of DFP causing more harm?
D
A is not, because purpose of discretionary policy is to stimulate automatic stabilizers. For the same reason, I go with D.
A and B are out because of the use of the phrase “likely to” both “may do” more harm than good but it is not “likely”. No reason given for brief unemployment spikes. So my answer would be D - discretionary policy to speed up stabilization…
correct the answer is D !!
BUMP I’m a little lost on this, wouldn’t additional intervention before the stabilizers kick in cause a over-stimulus in the economy, possibly driving up inflation? What am I missing? I thought for sure it would be A.
I’m working under the assumption that self correcting mechanisms are automatic stabilizers. In which case, if discretionary policy required less time to bring the economy back to LRAS, the automatic stabilizers would never kick in. For instance, there’s a recession and transfer payments aren’t sent out immediately. Instead, the government decides to spend a lot of money on whatever, creating jobs, and ultimately pushing the AD curve back to potential GDP. People who were out of work now are employed and do not receive unemployment benefits. Correct me if I’m wrong, but I don’t think automatic stabilizers could over stimulate or over decelerate the economy.
No you aren’t wrong, I think studying to long today really fried my brain. For some reason I thought the automatic stabilizers would kick in no matter what, so after the stimulus from discretionary policy, the automatic stabilizers would kick in. Wrong assumption.