Author Question: Evidence suggests that, with rare exceptions, economic policies are not manipulated in an effort to ... (Read 21 times)

kshipps · **on:** Jun 30, 2018

Evidence suggests that, with rare exceptions, economic policies are not manipulated in an effort to influence electoral outcomes. Use the Lucas critique to explain why not.

What will be an ideal response?

Question 2

All of the following describe the market for credit default swaps on mortgage-backed securities in the mid-2000s EXCEPT

A) an increasing number of buyers were speculators.
B) AIG apparently underestimated the risk involved with mortgage-backed securities.
C) the volume of credit default swaps was too low making it difficult to assess their value.
D) payments by buyers were too low relative to risk.

aliotak · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The strategy that would generate a political business cycle relies on naive voters to reward office holders for a short-term improvement in economic conditions. Once the strategy is implemented, however, voters get to experience the negative consequences of rising inflation and contractionary policies. Policy makers (and influencers) wise enough to recognize the change in expectations will not be tempted to attempt such a strategy.

Answer to Question 2

C