Clueless Economists Find the Answer
“A month ago, when we would normally have released ... an updated Canadian outlook, the economic landscape was in major disarray, and we instead put out a memo titled We Don’t Have a Clue and We’re Not Going to Pretend That We Do,” economists at the University of Toronto’s Institute for Policy Analysis noted. ... “Since that time, the situation has gradually settled down and important new information has been forthcoming such that we now feel that we have enough ‘clues’ to be able to present forecasts.” ... For Canada, they predict the economy contracted at a 0.2-percent annual pace in the summer quarter, will shrink a further 0.2 percent this quarter, and then by a marginal 0.1 percent in the first quarter of 2009, before expanding by 0.4 percent in the spring, and picking up steam in the second half of next year ... an anemic 0.4-percent expansion for all of 2008, down from 2.7 percent in 2007, and then only marginal 0.6-per-cent growth in 2009, after which it projects a strong 3.6-per-cent expansion in 2010.
a. Explain how economic forecasting can be used to improve discretionary fiscal policy.
b. How does the uncertainty surrounding economic forecasting limit the effectiveness of discretionary fiscal policy?
c. Given a forecast of an impending recession, explain how automatic stabilizers may help smooth out the business cycle.
d. Assuming that automatic stabilizers are not enough to address an impending recession, explain and draw a graph to illustrate how discretionary fiscal policy could be used. What are the potential consequences if these discretionary policies suffer from significant law-making and impact lags?