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 cur (LRAS) for the U.S. economy in February 2020. Suppose the government decides to intervene to bring the economy back to the natural level of output by using 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 successfu restore the natural level of output. PRICE LEVEL 150 130 110 90 70 50 20 22 LRAS 24 26 OUTPUT (Trillions of dollars) AS AD 28 30 AD policy. AS Suppose that in February 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 April 2020, consumer confidence increases, leading to an increase in consumer spending. 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.
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 cur (LRAS) for the U.S. economy in February 2020. Suppose the government decides to intervene to bring the economy back to the natural level of output by using 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 successfu restore the natural level of output. PRICE LEVEL 150 130 110 90 70 50 20 22 LRAS 24 26 OUTPUT (Trillions of dollars) AS AD 28 30 AD policy. AS Suppose that in February 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 April 2020, consumer confidence increases, leading to an increase in consumer spending. 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.
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Transcribed Image Text: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 February 2020.
Suppose the government decides to intervene to bring the economy back to the natural level of output by using
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.
PRICE LEVEL
150
130
110
90
70
50
20
22
LRAS
24
26
OUTPUT (Trillions of dollars)
AS
AD
28
30
AD
policy.
AS
Suppose that in February 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 April 2020, consumer confidence increases, leading to an increase in consumer spending. 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.
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