Question

8. Using policy to stabilize the economy

8. Using policy to stabilize the economy The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. The current tax system acts as an automatic stabilizer Which of the following are examples of automatic stabilizers? Check all that apply. Corporate income taxes Unemployment insurance benefits Personal income taxes

Answer 1

The arguments that are in favor of active stabilization policy by the government are as follows: • Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. As they stabilize the economy via the involvement of government. Thus, the correct answer is option A and B. Automatic stabilizers are non-discretionary fiscal policies which come into effect whenever there is a change in economy. Examples of automatic stabilizers are taxes and unemployment benefits. The example of automatic stabilizers is as follows: Corporate income taxes, Unemployment insurance benefits Personal income taxes All three offset economic fluctuations in nation's economic activity through normal operation without authorization by government or policymakers. Thus, the correct answer is option A, B and C.