04.28.08
AP Economics Study Guides
Check out Jason Welker’s Wikinomics study guide page for both the Macro and Micro exams.
AP Economics
Something To Think About
Something To Think About
Check out Jason Welker’s Wikinomics study guide page for both the Macro and Micro exams.
Brian said,
May 7, 2008 at 3:58 pm
Why would the government use fiscal policy (increase gov spending by sending stimulas checks out through deficit spending) to try to get out of a recession?
Through rational expectations prices are expected to rise due to the expansionary fiscal policy. Firms will supply less now and the supply of labor decreases since both firms and households can see that down the road they can supply at higher prices and turn more profit then they could right now. So since output is going to decrease at the same time as increasing demand wouldn’t that just mean stagflation is occuring which put us in an even worse situation? or is the government just hoping that the world doesn’t act rationally?… this is a pretty confusing situation
davidprudente said,
May 7, 2008 at 7:23 pm
Brian,
This is a perplexing issue. Do you think Congress is more concerned about taking action in an election year or providing long-term economic growth? Okay, that’s a loaded question. While I’m sure politicians would like both options, my instincts tell me that they will do things that they believe will get them re-elected. I think your analysis is pretty dead-on.
It’s kind of like the gas tax proposal that Clinton and McCain have proposed. It sounds good in the short-run but will simply increase demand and therefore gas prices in the not-so-distant future. A better solution to high gas prices would be to impose a pigovian tax to cut into demand.
Jason Welker said,
May 13, 2008 at 6:11 pm
Won’t the expectation of future price increases encourage firms to increase production, not decrease it, in response to the higher prices? That’s the law of supply, after all… I’m not arguing FOR a deficit financed fiscal stimulus package, I’m just wondering if rational expectations suggests that Brian’s outcome is what would occur… rather the expectation of future price increases due to expansionary fiscal policy might motivate firms to increase, rather than decrease production now.
On another note, I wanted to thank you, David, for linking to my Exam Prep page. over 160 people have found it thanks to your link! Good luck to your students on the exam tomorrow!
Jason Welker
davidprudente said,
May 13, 2008 at 6:49 pm
Jason,
Your point is well taken regarding the Rational Expectations. Might firms also adjust production because of higher expected input costs? Just a thought…Happy to provide the link as your sight has been a treasure trove of information. It’s really one of the most useful sites for the study of economics; I’m glad it has been rightfully recognized as such!
And good luck to your students who are probably sitting for the exam in about 24 hours from now.