CHAPTER 16
MACRO POLICY DEBATE: ACTIVE OR PASSIVE?
SOLUTIONS TO END OF CHAPTER PROBLEMS
1. The effectiveness of discretionary policy largely depends on the speed of self-correction
forces, the speed (and accuracy) of expectations adjustment, the information requirements
for policy, and the lags inherent in policy decision and implementation.
2. Suppose that the economy is initially producing real GDP level Ya with price level Pa. The
government policy reduces aggregate demand from AD to AD*. In the short run, the
economy moves along the SRAS curve to point b. Real GDP falls to Yb, the price level falls
3. The following AD-AS diagram illustrates the short-run effects on prices, output, and
employment of an increase in the money supply that is correctly anticipated by the public.
Economists of the rational expectations school believe that if the economy is already
Chapter 16 Macro Policy Debate: Active or Passive? 2
4.
a. Decision-making lag
5.
Chapter 16 Macro Policy Debate: Active or Passive? 3