Economics s350k
Summer 2014
Practice Problem Set 6
1. Explain the activist and non-activist positions on the use of government policy to stabilize macroeconomic variables such as real output. What problems are encountered in the pursuit of activist policies?
2. What is the Lucas critique of econometric policy evaluation? Why is it important?
3. What is time consistency?
4. What are the arguments for and against rules over discretion?
5. What is constrained discretion?
6. What is a nominal anchor, and how does it help with credibility?
7. Show that credibility of the Fed helps to stabilize output when (a) there are negative AD shocks.
8. Show that credibility of the Fed helps to stabilize the inflation when there are positive AD shocks.
9. Show that credibility of the Fed helps to stabilize both output and inflation when there are SRAS shocks.
10. Explain why Fed credibility reduces the cost of fighting inflation.
