Question

read Paul M. Romer's "Beyond Classical and Keynesian Macroeconomic Policy." artricle, then answer:

a. Explain Romer's analogy between monetary policy and blood doping.

b. Explain Romer's analogy between fiscal policy and a taper.

c. What does Romer suggest as the appropriate role for governmental economic policy?

D. Given that this article is from 1994, how much is applicable in today's economy.

Answer 1

A. blood doping(saving blood week sbefore the race and reinjecting just before the race) refers to the pump priming,monetary boost the government gives in the form of increased money supply during a reduced spending in the economy. The central bank controls the money supply during booms, encouraging more saving and on the onset of depression increases the money supply encouraging spending.

B.Tapering refers to the phenomena of using government spending (fiscal policy) in order to control or encourage domestic spending in the economy. The govt spending reduces in intensity as the economy is nearing the boom of a business cycle and the govt spending increases as there the economy goes towards a depression.

C. According to Romer, an appropriate role of governmental economic policy is to create an environment for change rather than following textbook oriented monetary and fiscal policy. ony market incentves are not enough to encourage change but educationand awareness through research and development are also needed. Political leadership is needed to encourage the people to dive in and work for the improvement of themseves and the economy as a whole.

D. The article even when written in 1994, is a fit forecast for the current economic situation.Romer's anayses of th evolving economy is right in envisaging the need for R&D which right now is gaining utmost importance in creative destruction. The logic for business cycles is still working in the same way as blood doping and tapering are used to change domestic spending.