Chapter 25 - Macroeconomic policy

Macroeconomic performance

________ may be improved if expectations of inflation are anchored.

Outside lag

________ (of macroeconomic policy): delay between the date a policy a change is implemented and the date by which most of its effects on the economy have occurred.

Central bank independence

________: when central bankers are insulated from short- term political considerations and are allowed to take long term view of the economy.

Supply side policy

________: policy that affects potential output.

Accommodating policy

policy that allows the effects of a shock to occur

Anchored inflationary expectations

when people's expectations of future inflation do not change even if inflation rises temporarily

Several institutional characteristics may help to enhance a central bank's credibility

the extent to which the central bank is independent from the executive and legislative branches of the government, the announcement of a numerical inflation target, and the reputation of the central bank as an "inflation hawk."

Credibility of monetary policy

degree to which the public believes the central bank's promises to keep inflation low, if even if doing so may impose short-run economic costs

Central bank independence

when central bankers are insulated from short-term political considerations and are allowed to take long term view of the economy

Inflation hawk

someone who is committed to achieving and maintaining low inflation, even at some short-run cost in reduced output and employment

Inflation dove

someone who is not strongly committed to achieving and maintaining low inflation

Supply-side policy

policy that affects potential output

Marginal tax rate

amount by which taxes rise when before-tax income rises by one dollar

Average tax rate

total taxes divided by total before-tax income

Inside lag (of macro economic policy)

delay between the date a policy change is needed and the date it is implemented

Outside lag (of macroeconomic policy)

delay between the date a policy a change is implemented and the date by which most of its effects on the economy have occurred

Accommodating policy

Policy that allows the effects of a shock to occur

Anchored inflationary expectations

When people's expectations of future inflation do not change even if inflation rises temporarily

Credibility of monetary policy

Degree to which the public believes the central bank's promises to keep inflation low, if even if doing so may impose short-run economic costs

Central bank independence

When central bankers are insulated from short-term political considerations and are allowed to take long term view of the economy

Inflation hawk

Someone who is committed to achieving and maintaining low inflation, even at some short-run cost in reduced output and employment

Inflation dove

Someone who is not strongly committed to achieving and maintaining low inflation

Supply-side policy

Policy that affects potential output

Marginal tax rate

Amount by which taxes rise when before-tax income rises by one dollar

Average tax rate

Total taxes divided by total before-tax income

Inside lag (of macro economic policy)

Delay between the date a policy change is needed and the date it is implemented

Outside lag (of macroeconomic policy)

Delay between the date a policy change is implemented and the date by which most of its effects on the economy have occurred