Stabilizing the Economy: Challenges and Solutions

What are some arguments against trying to use policy to stabilize the economy?

A. Pessimism on the part of households and firms may become a self-fulfilling prophecy.

B. Recessions represent a waste of resources.

C. "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.

D. Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

Answer:

One argument against using policy to stabilize the economy is that pessimism on the part of households and firms may become a self-fulfilling prophecy. This means that if people and businesses believe that the economy is going to worsen, they may reduce their spending and investments, which can actually lead to a decline in economic activity.

When it comes to stabilizing the economy, there are different arguments that can be made. One argument against using policy to stabilize the economy is the idea that pessimism on the part of households and firms may become a self-fulfilling prophecy. This means that if people and businesses believe that the economy is going to worsen, they may reduce their spending and investments, which can actually lead to a decline in economic activity.

Another argument is that recessions represent a waste of resources. During a recession, there is a decrease in production and employment, which means that resources are not being fully utilized.

Additionally, the concept of 'leaning against the wind' suggests that policymakers need to increase aggregate demand during recessions and reduce it during booms. However, this can be challenging as it requires accurate macroeconomic forecasting, which is not always developed sufficiently to allow policymakers to change aggregate demand at the proper time.