Evidence supporting the idea of political business cycle

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Reference no: EM131073798

There seems to be some evidence supporting the idea of a political business cycle. That is, the economy tends to experience particularly fast growth just prior to elections and slower growth or recessions some time after elections.

A. Explain why and how this happens. That is, what is the underlying motivation of those responsible for this effect and what actions (fiscal and/or monetary) do they take to achieve it?

B. Use the AD/AS model and the Phillips curve model to explain what effect the actions taken in part A will have on inflation if the economy starts from full employment.

C. Now, it may be that the position of the Phillips curve depends on people's expectations. If people have adaptive expectations and elected officials act in a way that is consistent with a political business cycle, how is the Phillips curve likely to shift?

D. In light of this, offer an explanation for the (actual) observation that countries with central banks that are very independent of elected officials tend to have lower inflation than do countries with central banks very closely tied to elected officials. Hint: Think about the ability of the central bank to carry out appropriate policy.

Reference no: EM131073798

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