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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in February 2026. Suppose the government chooses to intervene in order to return the economy 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 AS policy. ? Suppose that in February 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In July 2026, U.S. imports decrease because the United States has implemented trade restrictions on Mexican goods. Due to 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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in February 2026. Suppose the government chooses to intervene in order to return the economy 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 AS policy. ? Suppose that in February 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In July 2026, U.S. imports decrease because the United States has implemented trade restrictions on Mexican goods. Due to 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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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, as well as the pros and cons of using these tools to combat economic fluctuations.
The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the
U.S. economy in February 2026.
Suppose the government chooses to intervene in order to return the economy 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.
AS
110
X
AD
70
LRAS
24
26
OUTPUT (Trillions of dollars)
PRICE LEVEL
150
130
50
20
22
28
30
AD
policy.
AS
Suppose that in February 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in
the previous question. In July 2026, U.S. imports decrease because the United States has implemented trade restrictions on Mexican goods. Due to
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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