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Main Point - Macroeconomic Policy has evolved as economist have learned more and the structure of the macroeconomy has changed.
Main Point - The debate over macroeconomic policy involves understanding how the economy adjusts to economic shocks and how policy tools affect the economy.
Part # 1 - Macroeconomics Policy Debate
Reading - Macroeconomic Policy Debate - click here
Part # 2 - Macroeconomic Policy in AS-AD Model
Reading - Macroeconomic Policy in the AS-AD Model - click here
Practice Problem - Policy Choices - Use the AS-AD Model to determine which of the following are supply shocks and which are demand shocks, and the effect the shocks have on GDP, Unemployment and Inflation.
Practice Problem Sheet - click here (Answers)
Practice Problem - Fiscal Multipliers - Use the government spending multiplier and the tax cut multiplier to answer a set of questions.
Practice Problem Sheet - click here (Answers)
Practice Problem - Monetary Policy & Taylor Rule - The Taylor Rule is an equation developed to provide guidance for how a central bank like the Federal Reserve should set short-term interest rates (r) as economic conditions change to achieve both its short-run goal for stabilizing the economy and its long-run goal for inflation. The target rate of inflation is 2% and potential GDP is 2% . The Taylor Rule equation is shown to the right.
Use this information to answer the following questions. (Answers)
A. According to the Taylor Rule, what should the interest rate be if the economy currently has a rate of inflation that is 2% and a rate of GDP growth of 2%? Why might this interest rate be considered the “natural rate of interest” in the long run?
B. According to the Taylor Rule, what should the interest rate be if the economy currently has a rate of inflation that is 5% and a rate of GDP growth of 4%? Why would this rate of interest be appropriate given the current situation in the economy (use the concept of the “natural rate of interest”)?
C. According to the Taylor Rule, what should the interest rate be if the economy currently has a rate of inflation that is 1% and a rate of GDP growth of 1%? Why would this rate of interest be appropriate given the current situation in the economy (use the concept of the “natural rate of interest”)?
D. According to the Taylor Rule, what should the interest rate be if the economy currently has a rate of inflation that is 2% and a rate of GDP growth of 5%? Why would this rate of interest be appropriate given the current situation in the economy (use the concept of the “natural rate of interest”)?
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