Question

N the Barro-Gordon Model, Select one:

a. inflation in the cheating equilibrium is higher than the in discretionary equilibrium.
b. output in the discretionary equilibrium is the same as in the commitment equilibrium.
c. inflation in the discretionary equilibrium is the same as in the commitment equilibrium.
d. output in the discretionary equilibrium is higher than in the cheating equilibrium.

Answer 1

In the Barro-Gordon Model, inflation in the discretionary equilibrium is the same as in the commitment equilibrium.

Step-by-step explanation:

In the Barro-Gordon Model, the answer is option c. Inflation in the discretionary equilibrium is the same as in the commitment equilibrium.

The Barro-Gordon Model is a model that explains how inflation can be influenced by the actions and expectations of economic agents, such as policymakers and the public. In the discretionary equilibrium, policymakers have the ability to manipulate the level of inflation, while in the commitment equilibrium, policymakers commit to a fixed rule and cannot deviate from it.

In the discretionary equilibrium, policymakers can choose to increase inflation to temporarily lower unemployment. However, this is only possible if the public does not anticipate the increase in inflation. Once the public adjusts their expectations and anticipates the higher inflation, it becomes ineffective in reducing unemployment. Therefore, the inflation rate in the discretionary equilibrium will eventually be the same as in the commitment equilibrium.