Exploring Policy Rules and Credibility

8. Some parents discourage belief in Santa Claus, the Easter Bunny, the Tooth Fairy, etc. because they think that when their children finally learn the truth, they will be disillusioned and will distrust their parents for lying. What do you think? Are beliefs in Santa Claus and the Easter Bunny harmless, or is there a credibility price to pay for even this level of untruth? Justify your answer.

9. A few years ago I was in a dentist's waiting room with a woman and her two children. They were doing little things that they should not have been doing—messing up the magazines, running, fighting, etc.—and their mother kept telling them to stop. They did not stop, and she did nothing to stop them, except to keep telling them to stop. Eventually the receptionist could take it no longer and told the mother to take her children out to her car and wait there. Analyze this situation in terms of policy rules and credibility.

10. Governments keep secrets. It is easy to understand why they wish to withhold information from hostile governments, but sometimes they also withhold information from their own citizens. Many people believe that the U.S. government withholds information about aliens. Suppose that the U.S. government recovered a crashed spacecraft from another planet. What would be the rationale for keeping this information secret? What would be the rationale for making this information public? Does either rationale fit macroeconomic policy?

11. A library has a policy of fining patrons 25¢ per day for overdue books. After ten years it has thousands of dollars of unpaid fines for books that have been borrowed and never returned. It offers a "fine amnesty," whereby it allows people to return overdue books without any fine. What are the benefits and the costs of this amnesty? What happens to these costs and benefits as amnesties get more frequent? How does a fine amnesty illustrate the idea of time inconsistency?

12. When the economy is in recession, the president can face a no-win situation. If he avoids saying that the economy is in recession, his critics will say that because he will not level with the American people, he lacks credibility. If he states that the economy is in recession, his critics will say that his admission will cause people to be frightened and pessimistic and thereby make the recession worse. What would you advise the president to do in this situation and why?

13. Search the internet for the term "time inconsistency." What examples can you find that are not mentioned in the reading.

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