Question

1. A traditional model in which expectations about policy have no effect on the aggregate supply curve does not distinguish between the effects of anticipated or unanticipated policy. This model favors ……………………… policy, because the outcome of a particular policy is less uncertain.
2. If expectations about policy affect the aggregate supply curve, as they do in the new classical and new Keynesian models, an ………………………… policy will be more successful (will produce a faster reduction in inflation with smaller output loss) if it is credible.

Answer 1

Answer to the question no. 1:

A traditional model in which expectations about policy have no effect on the aggregate supply curve does not distinguish between the effects of anticipated or unanticipated policy. This model favors Fiscal policy, because the outcome of a particular policy is less uncertain.

Explanation: Here the traditional model is one in which the fiscal policy plyas a very important role in stimulating the economy. When the economy faces a recession, the governmnet by reducing the tax or/and raising the public expenditure, tries to raise the aggregate demand and this will ultimately raise the price and output in the economy. And the concept of anticipated or unanticipated policy is not there.

Answer to the question no. 2:

2. If expectations about policy affect the aggregate supply curve, as they do in the new classical and new Keynesian models, an Monetary policy will be more successful (will produce a faster reduction in inflation with smaller output loss) if it is credible.

Explanation: The anticipated policy action is introduced by the new classicals. In such situation, when the government undertakes a expansionary fiscal policy, people anticipated the policy change and also expect that the inflation will go up, so the labours will start demandig the higher wage which will ultimately reduce the aggregate supply and the natural rate of unemployment exist. But, a monetary policy in this case will have a same impact byt however an increase in the investment because of the fall in the rate of interest the reduction in aggregate supply will be less than that because of the fiscal policy. So, the fall in income will be at a lesser side.

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