6. (Fiscal Policy) Explain why effective discretionary fiscal policy requires information about each of the following:<br> a. The slope of the short-run aggregate supply curve<br> b. The natural rate of unemployment<br> c. The size of the spending multiplier<br> d. The speed with which self-correcting forces operate<br> This question goes to the heart of the information problems with discretionary policy and hence the basis of arguments made by many economists against “fine-tuning” the economy.<br> a. Information about the slope of the short-run aggregate supply curve is required because the steeper the curve, the greater the price change, and thus the greater the necessary fiscal stimulus.<br> b. The natural rate of unemployment must be known in order to determine potential GDP and therefore the size of the output gap.<br>c. The size of the spending multiplier must be known in order to determine the extent of the stimulus needed.<br>d. The speed at which self-correcting forces operate is important because, if self-correction is fast, policy may be correcting a problem that no longer exists by the time the fiscal stimulus kicks in.
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