CHAPTER 6

Lessons from Recent Macroeconomic Policy Making

A core argument of this book is that there are both long-run and short-run causes of low-employment equilibrium. The long-run causes are distortions in the price system that reduce aggregate supply. The short-run causes are price and wage rigidities that bring about distortions in aggregate demand and aggregate supply, sometimes leading to a need for corrective stabilization policies by government. In this chapter, we will see how the long-run causes can frustrate the short-run stabilization policies.

Traditionally, in macroeconomic policy analysis (and as evidenced by opinion editorials by Alan Blinder, much quoted in the previous chapters), macroeconomists see the distinction between ...

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