A. There is little debate about the relative magnitude of welfare gains from softening recessions versus increasing long-run growth rates. Still, governments expend substantial resources on fighting recessions, often by taking on debt and introducing incentive distortions into the economy, which in turn will harm long-run growth.

a. Suppose that, instead of taking the usual form, preferences are reference-based and exhibit a high degree of loss aversion. How does this change how we think about the welfare impact of recessions?

b. Suppose that the happiness literature is onto something, and that happiness is a more relative rather than absolute notion. How is this consistent with the claimed evidence that happiness within societies does not change much with time even as standards of living increase dramatically?

c. If you wanted to argue in favor of greater emphasis on softening recessions at the cost of accepting less long-run economic growth, how might you do this in light of your answers to (a)

and (b)?