question archive 1)Explain Hayek's "knowledge problem" and the Lucas Critique
1)Explain Hayek's "knowledge problem" and the Lucas Critique
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1)Explain Hayek's "knowledge problem" and the Lucas Critique.
2)How do expansionary policies differ from contractionary policies?
a. Expansionary policies seek to increase economic growth and increase employment while contractionary policies seek to reduce the risk of excessive price inflation.
b. Expansionary policies seek to shift the labor demand curve to the right, while contractonary polcies seek to shift it to the left.
c. Expansionary policies seek to reduce the severity of recessions, while contractionary policies seek to slow down the economy when it grows too fast.
d. all of the above.
e. Only A and C are correct.
2. What could explain why a decrease in taxes could lead to less-than-proportionate increase in output?
a. Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future.
b. As a result of diminishing returns to current consumption, consumers may choose to spread extra spending over the long term rather than consuming the proceeds of a tx cut all at once.
c. A decrease in taxes will necessitate lower government outlays, thus largely offsetting the higher consumption expenditures of households
d. all of the above
e. a and b only
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1)According to Hayek, "knowledge problem" deals with the distribution of data that is essential for logical and reasonable economic planning. It deals with the problem of obtaining the equilibrium without having important information.
The Lucas critique was that the implementation and formulation of policies should not be based on assumptions and expectations. He believed that individuals would adapt to policy changes. With the change in the polices, firms and individuals will also change their expectations.
2)
1. The correct answer is: d. all of the above.
Expansionary policies are adopted in order to create economic growth. These policies stimulate the economy by increasing the money supply and charging interest at a low rate. Contractionary policies are adopted by the government through either spending reduction or tax increase. The government adopts these policies as a means of fighting inflation.
2. The correct answer is: e. a and b only.
A decrease in taxes leads to an increase in income and demand. An increase in demand, in return, leads to increased output.
