tailieunhanh - Ten Principles of Economics - Part 78

Ten Principles of Economics - Part 78. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 797 October of that year Volcker moved to contract monetary policy to combat the high rate of inflation that he had inherited from his predecessor. The predictable result of Volcker s decision was a recession and the predictable result of the recession was a decline in Carter s popularity. Rather than using monetary policy to help the president who had appointed him Volcker helped to ensure Carter s defeat by Ronald Reagan in the November 1980 election. The practical importance of time inconsistency is also far from clear. Although most people are skeptical of central-bank announcements central bankers can achieve credibility over time by backing up their words with actions. In the 1990s the Fed achieved and maintained a low rate of inflation despite the ever present temptation to take advantage of the short-run tradeoff between inflation and unemployment. This experience shows that low inflation does not require that the Fed be committed to a policy rule. Any attempt to replace discretion with a rule must confront the difficult task of specifying a precise rule. Despite much research examining the costs and benefits of alternative rules economists have not reached a consensus about what a good rule would be. Until there is a consensus society has little choice but to give central bankers discretion to conduct monetary policy as they see fit. I QUICK QUIZ Give an example of a monetary policy rule. Why might your rule be better than discretionary policy Why might it be worse SHOULD THE CENTRAL BANK AIM FOR ZERO INFLATION One of the Ten Principles of Economics discussed in Chapter 1 and developed more fully in Chapter 28 is that prices rise when the government prints too much money. Another of the Ten Principles of Economics discussed in Chapter 1 and developed more fully in Chapter 33 is that society faces a short-run tradeoff between inflation and unemployment. Put together these two principles raise a question for

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