Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
This Application addresses the idea that politicians use monetary or fiscal policy to stimulate the economy before an election to improve their reelection prospects. This concept is known as a(n)
▸ circular flow model.
▸ automatic stabilization policy.
▸ liquidity trap.
▸ political business cycle.
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