Introductie

Question 1

What do policymakers do in practice?

Answer 1

• Make laws regarding economy
• Collect and spend taxes
• Produce public goods (Public transportation, hospitals)
• Guarding/managing the national currency
• International exchange

Question 2

How do policymakers work together?

Answer 2

These policymakers work together in institutions (National Bank), and use instruments (Fiscal/monetary policy) to achieve their goals (price stability or full employment)

Question 3

“To reach your objectives, you must
have at least as many independent
instruments as you have objectives”
- Jan Tinbergen.

Explain with an example

Answer 3

If you have less instruments, there are inevitably trade-offs to be made.

For example:
“How much more wage inequality the government stands ready to accept to reduce the unemployment rate by one percentage point?”

Question 4

The three key functions of economic policy: Allocation Function

Answer 4

Deals with the correct and efficient distribution of goods

For example:
- Preventing monopolies with competition policy / antitrust laws

• Limiting external effects, for example by addressing climate change through emission rights
• Address incomplete information (more clarity for consumers), for example through accounting laws

Question 5

The three key functions of economic policy: Stabilisation Function

Answer 5

Prevent or limit fluctuations (of things like unemployment, total output of a country, prices, supply&demand,…)

Ensuring stable economic growth

Provide guarantees such as Draghi’s famous quote; ‘We will do whatever it takes’.

Question 6

The three key functions of economic policy: Distribution function

Answer 6

• Bringing more fairness, for example by taxing the rich and transferring them to poorer households
• Trying to achieve a Pareto optimal situation
• Trade-off between equity-efficiency
• Social welfare criteria are needed to make the right decisions.

Question 7

Discretionary measures

Answer 7

Measures that are selected according to a more specific problem. Are often used when a problem has a lot of uncertainty. Active policy.

Question 8

Predetermined policy rules

Answer 8

Economic measures that are inserted in advance and then just “do their thing”. Used in transparent, predictable situations. Passive policy.

Question 9

The limits of economic policy: Information problems

Answer 9

Data issues (delay, wrong data, access)

Model uncertainty (e.g. specification, variables to be included, parameters estimated with uncertainty)

Question 10

The limits of economic policy: Lucas critique

Answer 10

Changes in economic policy will affect the behaviour of private agents (households, firms)

Models that do not allow for agents to adjust their behavior cannot be used for policy

Question 11

The limits of economic policy: Much debate over its effectiveness

Answer 11

Policy effectiveness depends on agents’ confidence: policy that is credible gains effectiveness and vice versa

Time inconsistency: situations where, with the passing of time, policies that were determined to be optimal yesterday are no longer perceived to be optimal today

Question 12

The limits of benevolence

Answer 12

Electoral cycles and partisan preferences

Re-election motivations

Pressure from special interest groups

Question 13

Macroeconomic perspective: Sustainable Economic Growth

Answer 13

Growth that does not occur at the expense of the well-being of future generations (due to predatory exploitation of the environment, for instance)

Growth that is accompanied by a fair distribution of income and wealth within the population.

Question 14

Macroeconomic perspective: Balanced growth

Answer 14

Optimal utilization of the labor supply (frequently referred to as ‘full employment’)

Price stability (low inflation)

Stable balance of payments (no excessive current account deficit) and the associated preservation of international competitiveness

Balanced public finances (essentially a sustainable public debt)

Question 15

VUCA World

Answer 15

Volatile, Uncertain, Complex, Ambiguous

The acronym came into common usage in the late 1990s to describe the world’s new reality.

Question 16

Chaordic

Answer 16

Combination of Chaos en Order

Conceived in the wake of the 2008 crisis. When many laws and regulations were devised to monitor everything

All sorts of indices were devised to “measure” uncertainty

Question 17

A constantly changing environment: Shocks
What? + Example
Time?
Effect?
Cause?

Answer 17

Concentrated events which impact the economy in a positive/negative way

Short term

Destabilizing, not always transformational

Mostly change in exogenous factors

Question 18

A constantly changing environment: Regime Changes
What? + Example
Time?
Effect?
Cause?

Answer 18

Change of order, establishment of new organisations, institutions

Mostly transformational, permanent or long-term change

Substantial social and/or economic impact

Orderly or disorderly

Question 19

A constantly changing environment: Chaos
What? + Example
Time?
Effect?
Cause?

Answer 19

The sudden transition from a situation of high
predictability to one of high uncertainty (Berlin Wall)

Small changes with huge consequences

Highly destabilizing, usually transformational

Question 20

A constantly changing environment: Mega trends
What?
Time?
Effect?
Cause?

Answer 20

Gradual transformation over the longer term

Predictable, but affect society and economy in a complex way and thus full social/economic impact is often very uncertain

Question 21

Whenever one asks economists about the next severe crisis, they will most likely refer to:

Answer 21

(1) a repetition of facts that already happened in the past

(2) an escalation/worsening of events that happened very recently or are happening
at this very moment

Question 22

Employment growth versus productivity growth

Answer 22

• In some European countries fewer people work, but those who work have a high level of productivity. Other countries achieve much better performances about employment but at the price of weaker productivity.
• Answer to this trade-off: reshaping institutions (requiring supply-side policies), like for example more investment in education and lifelong learning, an environment that fosters innovation,…