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Suppose that after graduating from Auburn, you take a job in Washington
as the President's chief Keynesian policy coordinator. (Your official title
is Chaiman of the Council of Economic
Advisers.) Luckily, full-employment (without inflation) has been achieved
by your predecessor.
Your job, then, is to maintain the interest rate and national income at their current levels of i = 8% and Y = $9 trillion. You have two phones on your desk in the Executive Office Building. One phone (labeled FED) is a hotline to Alan Greenspan; the other (labeled CONGRESS) is a hotline to your chief ally on Capitol Hill. Now, here is your game plan: When you wake up and discover that either i or Y (or both) have changed, you call the FED or CONGRESS (or both) and give advice about monetary policy and fisal policy. Make only one call, though, unless two are necessary. |
Record (by circling the appropriate ALL-CAP choices) your strategy during
your first four days on the job. If you can't visualize what has happened
and how to fix it, then print four copies of the Hicks-Hansen
Eight-Quadrant Exposition as an aid to identifying the problem and
specifying the fix. Hint: If both i and Y have changed, then assume that
only one of the two curves in that center quadrant (IS or LM) has shifted.
(And remember: If it appears that the economy has moved along one of the
two cruves, then it's the other one that must have shifted.) If the problem
is in the real sector, what specifically do you think the problem probably
is? If the problem is in the monetary sector, what do you think that problem
is? If only Y has changed or if only i has changed, then there are problems
in both (real and monetary) sectors. What do you those problems are? How
is the (fiscal and/or monetary) fix best tailored to fit the (real and/or
monetary) problem? Note: This study exercise could have been set up with
a game plan that involved tax policy instead of (or in addition to) government-spendign
policy. How would your fiscal policy recommendations change if you were
constrained (maybe by some read-my-lips pledge made by the President) to
keep the budget balanced?
On day one... | So, you call... | And you recommend... |
you discover that
i = 7% and Y = $9.8 |
CONGRESS
THE FED |
INCREASE GOVERNMENT SPENDING
DECREASE GOVERNMENT SPENDING INCREASE THE MONEY SUPPLY
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On day two... | So, you call... | And you recommend... |
you discover that
i = 7% and Y = $8.2 |
CONGRESS
THE FED |
INCREASE GOVERNMENT SPENDING
DECREASE GOVERNMENT SPENDING INCREASE THE MONEY SUPPLY
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On day three... | So, you call... | And you recommend... |
you discover that
i = 9% and Y = $9.0 |
CONGRESS
THE FED |
INCREASE GOVERNMENT SPENDING
DECREASE GOVERNMENT SPENDING INCREASE THE MONEY SUPPLY
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On day four... | So, you call... | And you recommend... |
you discover that
i = 8% and Y = $8.2 |
CONGRESS
THE FED |
INCREASE GOVERNMENT SPENDING
DECREASE GOVERNMENT SPENDING INCREASE THE MONEY SUPPLY
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How many economic and political problems can you identify that might stand in the way of your successfully carrying out this game plan? What alternative game plan might you (or the President) adopt?