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When we talk about the economy, we often talk about expected behavior.  When prices...

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sj83 | (Level 1) Valedictorian

Posted September 18, 2013 at 6:57 PM via web

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When we talk about the economy, we often talk about expected behavior.  When prices increase, we expect consumers and suppliers to react a certain way.  When there is unemployment, we expect markets to react a certain way.  This is similar to what we are talking about with the bag of tricks the Fed has available.  If interest rates are low, we expect consumers to exhibit certain behaviors.  What we are finding is that the standard options did not work as expected.  Do you think there is danger in relying on expected outcomes when looking at policy decisions?  Do you think there is danger in resorting to alternative options that aren't known to work?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 18, 2013 at 7:10 PM (Answer #1)

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When it comes to macroeconomic policy, there is danger in everything.  Relying on expected outcomes is dangerous.  On the other hand, not relying on expected outcomes has its problems.  So does the idea of trying things that are not known to work.  There are no guarantees when it comes to macroeconomic policy.

The danger in relying on expected outcomes is that there is no guarantee that the outcomes will be the same in the future as they have been in the past.  Economics is not physics.  There are many factors that can intervene and cause a previously successful tactic to fail. 

Although relying on expected outcomes is dangerous, it is probably better than the alternative.  If you do not rely on expected outcomes at all, you are only guessing about the impacts that your policies will have.  When talking about macroeconomics, the consequences of blind guesses can be catastrophic for a country.  It surely does not make much sense to try untested, theoretical solutions unless your country is in the most dire of circumstances.

Overall, it makes the most sense to rely on expected outcomes, but not to do so blindly.  You must think about how certain macroeconomic tools have worked in the past, but you must also be aware of differences between the present situation and the past that might cause different outcomes this time around.

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