Question

7. Use of discretionary policy to stabilize the economy 

Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations. 

The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in April 2020. 

Suppose the government decides to intervene to bring the economy back to the natural level of output by using _______  policy. 

Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output. 

Suppose that in April the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output given in the previous scenario. In June 2020, U.S. exports decrease because Japan implements trade restrictions on U.S. goods. Because of the _______  associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely _______  once the effects of the policy are fully realized

Answer 1