II Parte

“The Real Business-Cycle Approach” in Principles of Macroeconomics, by Joseph Stiglitz, pp. 652-653.W.W.Norton, 1993

The position of the real business-cycle theorists is the easiest to explain. As has been pointed out, they believe that the source of economic fluctuations is exogenous shocks the economy, to which the economy quickly and efficiently responds. The fluctuations do not require government intervention because the market economy will give the best possible solution. Even the variability in income to which fluctuations give rise is not a problem; people acting rationally will have put aside savings to protect themselves against hard times. And unemployment, according to real business-cycle theorists, is more apparent than real. Individuals who want jobs could get them if only they lowered their expectations as to wage and nonpecuniary remuneration. It is better to encourage them to do this and move quickly to new jobs than to prolong the agony by allowing them not to face the facts.

While monetary policy is unnecessary to real business-cycle economists, it is also largely ineffective. If firms see that the government has increased the money supply, they simply increase prices proportionately. And individuals and firms protect themselves against the effects of change in the price level through indexing. There are no real effects. The real money supply and the real credit supply are unchanged. A distinctive lesson of the real business-cycle view is that while the government can offer no relief, it can also do no harm.

In the form just presented, the real business-cycle theory may seem too extreme -- monetary policy has no effect, inflation has no consequences, unemployment is not important. Still, many economists believe that its basic lesson is still correct: by and large, economic fluctuations are a result of real disturbances, to which the economy adjusts relatively efficiently, and government policy is unlikely to speed or improve the adjustment.

While monetary policy has no effect according to the real business-cycle theory, fiscal policy does. The effect is simple and straightforward: government expenditures divert resources from private consumption to the government. But fiscal policy does not have any effect on the real unemployment rate since there is, in real business-cycle theorists’ perspective, no unemployment.

This view of fiscal policy is different from that found in traditional Keynesian analysis. To Keynesians, the government expenditure level has a direct effect in stimulating the economy. Taxes have exactly the opposite effect, and much of their focus is on the difference between expenditures and revenues -- the deficits. Deficits stimulate the economy. Real business-cycle theorists deny this. They believe that only the expenditures matter; deficits are as irrelevant as monetary policy. If the government borrows to pay for current expenditures (deficit spending), taxpayers know that eventually they will have to pay, so they set aside the appropriate amount. Savings rise to match the deficit. The failure of household savings to rise in response to the huge government deficits of the past decade has provided the most telling criticism against this aspect of real business-cycle theory.

The text you just read brings some important differences between the Real Business Cycle (RB-C, for short), the monetarists and the Keynesians. Check if the statement below is right or wrong.

Item 0 - The RB-C economists believe that government intervention in the economy is ineffective in changing the Cycle.

II Parte

“The Real Business-Cycle Approach” in Principles of Macroeconomics, by Joseph Stiglitz, pp. 652-653.W.W.Norton, 1993

The position of the real business-cycle theorists is the easiest to explain. As has been pointed out, they believe that the source of economic fluctuations is exogenous shocks the economy, to which the economy quickly and efficiently responds. The fluctuations do not require government intervention because the market economy will give the best possible solution. Even the variability in income to which fluctuations give rise is not a problem; people acting rationally will have put aside savings to protect themselves against hard times. And unemployment, according to real business-cycle theorists, is more apparent than real. Individuals who want jobs could get them if only they lowered their expectations as to wage and nonpecuniary remuneration. It is better to encourage them to do this and move quickly to new jobs than to prolong the agony by allowing them not to face the facts.

While monetary policy is unnecessary to real business-cycle economists, it is also largely ineffective. If firms see that the government has increased the money supply, they simply increase prices proportionately. And individuals and firms protect themselves against the effects of change in the price level through indexing. There are no real effects. The real money supply and the real credit supply are unchanged. A distinctive lesson of the real business-cycle view is that while the government can offer no relief, it can also do no harm.

In the form just presented, the real business-cycle theory may seem too extreme -- monetary policy has no effect, inflation has no consequences, unemployment is not important. Still, many economists believe that its basic lesson is still correct: by and large, economic fluctuations are a result of real disturbances, to which the economy adjusts relatively efficiently, and government policy is unlikely to speed or improve the adjustment.

While monetary policy has no effect according to the real business-cycle theory, fiscal policy does. The effect is simple and straightforward: government expenditures divert resources from private consumption to the government. But fiscal policy does not have any effect on the real unemployment rate since there is, in real business-cycle theorists’ perspective, no unemployment.

This view of fiscal policy is different from that found in traditional Keynesian analysis. To Keynesians, the government expenditure level has a direct effect in stimulating the economy. Taxes have exactly the opposite effect, and much of their focus is on the difference between expenditures and revenues -- the deficits. Deficits stimulate the economy. Real business-cycle theorists deny this. They believe that only the expenditures matter; deficits are as irrelevant as monetary policy. If the government borrows to pay for current expenditures (deficit spending), taxpayers know that eventually they will have to pay, so they set aside the appropriate amount. Savings rise to match the deficit. The failure of household savings to rise in response to the huge government deficits of the past decade has provided the most telling criticism against this aspect of real business-cycle theory.

The text you just read brings some important differences between the Real Business Cycle (RB-C, for short), the monetarists and the Keynesians. Check if the statement below is right or wrong.

Item 3 - They also believe that the economic agents quickly adjust to any action taken by the government.

Based on your interpretation of the text you are about to read, determine whether each statement is right or wrong.

Part III

“The Swedish Investment Funds System” in Macroeconomics, by N.G. Mankiw, P.449. Worth Publisher, 1992

Tax incentives for investment are one-tool policymakers can use to control aggregate demand. For example, an increase in the investment tax credit reduces the cost of capital, shifts the investment function outward, and raises aggregate demand. Similarly, a reduction in the tax credit reduces aggregate demand by making investment more costly.

From the mid-1950s to the mid-1970s, the government of Sweden attempted to control aggregate demand by encouraging or discouraging investment. A system called the investment fund subsidized investment, much like an investment tax credit, during periods of recession. When government officials decided that economic growth had slowed, they authorized a temporary investment subsidy. When the officials concluded that the economy had recovered sufficiently, they revoked the subsidy. Eventually, however, Sweden abandoned the use of temporary investment subsidies to control the business cycle, and the subsidy became a permanent feature of Swedish tax policy.

Should investment subsidies be used to combat economic fluctuations? Some economists believe that, for the two decades it was in effect, the Swedish policy reduced the magnitude of the business cycle. Others believe that this policy can have unintended and perverse effects: for example, if the economy begins to slow down, firms may anticipate a future subsidy and delay investment, making the slowdown worse. Thus, the implications of this policy are complex, which makes its effect on economic performance hard to evaluate.

Item 2 - It is implied by the text discussion that a policy like the tax credit devised by the Swedish government loses its objective when there is no anticipation of its benefits.

Considere a equação de diferenças finitas !$ |y_{t-2} - 3y_{t-1} + 2{ y_t} = 10 !$.

Item 3 - Representa um processo oscilatório.

Based on your interpretation of the text you are about to read, determine whether each statement is right or wrong.

Part III

“The Swedish Investment Funds System” in Macroeconomics, by N.G. Mankiw, P.449. Worth Publisher, 1992

Tax incentives for investment are one-tool policymakers can use to control aggregate demand. For example, an increase in the investment tax credit reduces the cost of capital, shifts the investment function outward, and raises aggregate demand. Similarly, a reduction in the tax credit reduces aggregate demand by making investment more costly.

From the mid-1950s to the mid-1970s, the government of Sweden attempted to control aggregate demand by encouraging or discouraging investment. A system called the investment fund subsidized investment, much like an investment tax credit, during periods of recession. When government officials decided that economic growth had slowed, they authorized a temporary investment subsidy. When the officials concluded that the economy had recovered sufficiently, they revoked the subsidy. Eventually, however, Sweden abandoned the use of temporary investment subsidies to control the business cycle, and the subsidy became a permanent feature of Swedish tax policy.

Should investment subsidies be used to combat economic fluctuations? Some economists believe that, for the two decades it was in effect, the Swedish policy reduced the magnitude of the business cycle. Others believe that this policy can have unintended and perverse effects: for example, if the economy begins to slow down, firms may anticipate a future subsidy and delay investment, making the slowdown worse. Thus, the implications of this policy are complex, which makes its effect on economic performance hard to evaluate.

Item 2 - Stiglitz in the previous section and Mankiw in the above section imply that any policy, where the economic agents are well informed and anticipate the benefit, loses its effectiveness.

Based on your interpretation of the text you are about to read, determine whether each statement is right or wrong.

Part III

“The Swedish Investment Funds System” in Macroeconomics, by N.G. Mankiw, P.449. Worth Publisher, 1992

Tax incentives for investment are one-tool policymakers can use to control aggregate demand. For example, an increase in the investment tax credit reduces the cost of capital, shifts the investment function outward, and raises aggregate demand. Similarly, a reduction in the tax credit reduces aggregate demand by making investment more costly.

From the mid-1950s to the mid-1970s, the government of Sweden attempted to control aggregate demand by encouraging or discouraging investment. A system called the investment fund subsidized investment, much like an investment tax credit, during periods of recession. When government officials decided that economic growth had slowed, they authorized a temporary investment subsidy. When the officials concluded that the economy had recovered sufficiently, they revoked the subsidy. Eventually, however, Sweden abandoned the use of temporary investment subsidies to control the business cycle, and the subsidy became a permanent feature of Swedish tax policy.

Should investment subsidies be used to combat economic fluctuations? Some economists believe that, for the two decades it was in effect, the Swedish policy reduced the magnitude of the business cycle. Others believe that this policy can have unintended and perverse effects: for example, if the economy begins to slow down, firms may anticipate a future subsidy and delay investment, making the slowdown worse. Thus, the implications of this policy are complex, which makes its effect on economic performance hard to evaluate.

Item 1 - The author also argues that the investment tax credit reduces the cost of capital but it would be more effective where capital is scarce.