Chapter 17 active vs. Passive policymaking

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

rational expectations theory	The percentage annual monetary premium paid for borrowing.
Keynes effect	Trade-offs between inflation and unemployment.
demand-side stagflation	People learn to anticipate the results of policies.
Keynesian “shock” and “structuralist” hypotheses	Deviations from normal frictional unemployment are caused by macropolicy.
nominal interest rate	Monetary interest adjusted for inflation.
Fisher effect	Expanding the money supply unexpectedly initially causes nominal interest rates to fall.
real interest rate	Contracting the money supply unexpectedly ultimately causes the nominal interest rate to fall.
natural rate theory	Workers adjust to anticipated inflation by reducing labor supplies.
Phillips curves	Falling Aggregate Supply boosts prices and unemployment.
supply-side stagflation	Explains Phillips curves by labor market “bottlenecks” and changing intensities of shocks.

2. Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Active vs. Passive policymaking

Chapter Objectives

After you have read and studied this chapter you should be able to describe alternative interpretations of the Phillips curve hypothesis that inflation and unemployment are inversely related; discuss the theoretical debate concerning the merits of both active verses passive policymaking; evaluate various policies to fight inflation and stagflation, including the theory of the natural rate of unemployment; describe the natural real rate of interest hypothesis, and the Keynes and Fisher effects; and discuss New Classical Macroeconomic theories such as competitive markets, efficient markets, rational expectations, and real business cycles.

Chapter Review: Key Points

1. The Phillips curve depicts a trade-off for policymakers between unemployment and inflation. Lower unemployment rates presumably might be purchased through higher inflation, or vice versa; it is up to policymakers to choose the least harmful mix of evils. The Phillips curve appeared to be relatively stable through the 1960s, but it shifted sharply in the 1970s and early 1980s so that much higher rates of unemployment appeared necessary to dampen inflationary pressures. The reasons for the instability of the Phillips curve are the subject of a continuing debate within the economics profession.

2. Modern Keynesian analysis suggests that several factors in addition to inflationary expectations can cause stagflation and instability in the Phillips curve. Wages and prices are assumed “sticky”, especially in downward direction. Unexpected shocks to the supply side, rapid structural changes in demand or output, changes in labor institutions that generate disincentives for work, and changes in public regulatory policies can all shift the Phillips curve. The Keynesian structuralist approach emphasizes production “bottlenecks” as foundations for the Phillips curve.

3. The natural rate theory of the instability in the Phillips trade-off focuses on worker expectations of inflation. As labor begins to anticipate inflation, greater increases in wages are required for a given level of real output. Thus, accelerating inflation is required if policymakers desire to hold unemployment below its “natural rate,” but even this policy will not work forever.

4. If interest rate targets or unemployment rate objectives are set below their “natural rates,” expansionary policies may ultimately cause nominal interest rates to rise, not fall. Natural-rate theorists believe that only temporary reductions in interest rates or unemployment can be obtained through expansionary policies, and even in the short run, only by “fooling” lenders or workers.

5. The Keynes effect predicts that monetary growth will decrease interest rates, and vice versa. The Fisher effect is the upwards adjustment of nominal interest rates when transactors begin expecting inflation.

6. The new classical macroeconomics is based on the model of perfect competition, or efficient markets, which suggests that even in the short run, macropolicy only works when the economy is operating inefficiently and that this does not occur.

7. The theory of rational expectations suggests that people eventually figure out how a given change in policy affects the economy and learn to predict how policymakers react to swings in economic activity. Thereafter, people will focus on what policymakers are doing and make adjustments that prevent the policies from accomplishing their objectives.

8. Real business cycle theory views shocks to Aggregate Supply as permanent, and suggests that attempts by macroeconomic policymakers to “fine-tune” the economy are either self defeating or harmful.

3. Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Идущая по нарастающей инфляция; "естественный" уровень безработицы; accomplish one’s objectives; выработка как активного так и паcсивного политического курса; given level of real output; проводить государственное регулирование экономики с компенсацией колебаний конъюнктуры; operate inefficiently; приспособить ч-то к чему-то; affect; альтернативное толкование; inflationary pressures; ожидать инфляцию; interest rate target;ожидаемая инфляция; boost (verb); заёмные операции; competitive market; продолжающиеся (продолжительные) споры; contract the money supply; сдерживать, глушить, демпфировать; natural rate theory; споры в среде экономистов; labor institutions; стагфляция на стороне спроса; представлять, иллюстрировать, описывать; deviations from sth; отрицательные стимулы к работе; efficient market; подчёркивать, придавать особое значение; eventually; расширить предоставление денег; expansionary policy; бороться с инфляцией; точно регулировать экономику; foundations for the Phillips curve; given level of real output; удерживать уровень безработицы ниже его «естественного уровня»; occur; в сторону понижения; in the short run; inflationary pressures; initially; глубина и сила шоковых воздействий (потрясений); ставка ссудного процента; inversely related; узкие места рынка труда; least harmful mix of evils; ссудодатель; make adjustments; процент в денежном выражении; natural rate theory of the instability; естественная фактическая (реальная) процентная ставка (за вычетом инфляционной ставки); supply-side stagflation; сторонники теории естественного уровня (безработицы); объявленная ставка процента; objective; получить, добиться путем применения некоторой политики; percentage annual monetary premium;совершенная немонополистическая конкуренция; presumably; production “bottleneck”; государственная нормативно-правовой политика; rapid structural changes; теория рациональных ожиданий; real business cycle; реальный объём производства; self defeating; резко сместиться; потрясения со стороны предложения; “structuralist” hypotheses; стагфляция со стороны предложения; swings in economic activity; trade-offs between sth and sth; участник экономического процесса, субъект экономической деятельности; ultimately; unemployment rate objectives; корректировка в сторону повышения; various policies; и наоборот; view shocks to sth as permanent; срабатывать всегда, вечно; unexpected shocks; ожидания рабочих, связанных с инфляцией.