Alternative Economic Environments

Abstract

The purpose of this chapter is to examine the effect of different economic environments on the economy in the medium-term. It is closely related to Chapter 12, which presented our standard view of the economy in 1980, because it considers the effect on the economy of alternative values for the main variables which are exogenous to the model. This chapter shows the sensitivity of the standard view to possible prediction error in the exogenous variables which are largely beyond the control of the government. But the scope of the chapter is somewhat wider than this since it aims to show the response of the economy, in so far as this is reflected by the model, to changes in particularly unpredictable factors, both internal and external to the economy which are part of the economic environment; in some instances simulations with the model are outside the range of likely prediction error.