ECON 102 Lecture Notes - Lecture 15: Procyclical And Countercyclical, Benevolent Dictatorship, Consumption Smoothing

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Adam Stevenson

Document Summary

Seems obvious in recessions (it implies more income in the bad times). But why would we do it in expansions as well: claim: most people prefer a constant, certain stream of income to an uncertain one. Business cycle is like a big repetition of financial losses and gains. Countercyclical policy strives for certain payoff because most people are risk averse and prefer the certain payoff. It has recommendations for both booms and busts: how do we execute this type of policy, fi(cid:396)st, (cid:449)e"ll (cid:373)ake t(cid:449)o (cid:894)(cid:448)e(cid:396)(cid:455) st(cid:396)o(cid:374)g! (cid:895) assu(cid:373)ptio(cid:374)s: Full information: we know exactly when shocks are coming, how big the shock is, and exactly what ad, sras, lras look like. Benevolent dictator: we can intervene immediately, and the policy takes full effect immediately. If so, the government is able to completely counteract all fluctuations in output around the lr growth path.