**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 March 2023.Suppose the government decides to intervene to bring the economy back to the natural level of output by using _______________ policy. *Note: The omitted portion requires users to think about which type of policy (monetary or fiscal) would be used to stabilize the economy.* **Title: Understanding Government Policy Impact on Economic Output****Text:**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.**Graph Description:**The graph illustrates the interaction between the Aggregate Supply (AS), Aggregate Demand (AD), and Long-Run Aggregate Supply (LRAS) curves. - The vertical axis represents the price level, ranging from 50 to 150.- The horizontal axis represents output in trillions of dollars, ranging from 20 to 30.- The AS curve is depicted in orange, upward sloping, indicating the positive relationship between price level and quantity of goods supplied.- The AD curve is shown in blue, downward sloping, indicating the inverse relationship between the price level and the quantity of goods demanded.- The LRAS is depicted as a vertical purple line at an output level of 24 trillion dollars, representing the economy's natural level of output where all resources are fully employed.**Scenario:**Suppose that in March, the government undertakes the type of policy necessary to bring the economy back to the natural level of output in the preceding scenario. In July 2023, U.S. exports decrease because China implements trade restrictions on U.S. goods. Because of the shifts associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely influence the economy to reach equilibrium once the effects of the policy are fully realized.

Cöre the natural level of output. 150 AS AD 130 110 AS 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) opose that in March the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the ceding scenario. In July 2023, U.S. exports decrease because China 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.

Cöre the natural level of output. 150 AS AD 130 110 AS 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) opose that in March the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the ceding scenario. In July 2023, U.S. exports decrease because China 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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**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 March 2023.

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

*Note: The omitted portion requires users to think about which type of policy (monetary or fiscal) would be used to stabilize the economy.*

**Title: Understanding Government Policy Impact on Economic Output**

**Text:**

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.

**Graph Description:**

The graph illustrates the interaction between the Aggregate Supply (AS), Aggregate Demand (AD), and Long-Run Aggregate Supply (LRAS) curves.

- The vertical axis represents the price level, ranging from 50 to 150.
- The horizontal axis represents output in trillions of dollars, ranging from 20 to 30.
- The AS curve is depicted in orange, upward sloping, indicating the positive relationship between price level and quantity of goods supplied.
- The AD curve is shown in blue, downward sloping, indicating the inverse relationship between the price level and the quantity of goods demanded.
- The LRAS is depicted as a vertical purple line at an output level of 24 trillion dollars, representing the economy's natural level of output where all resources are fully employed.

**Scenario:**

Suppose that in March, the government undertakes the type of policy necessary to bring the economy back to the natural level of output in the preceding scenario. In July 2023, U.S. exports decrease because China implements trade restrictions on U.S. goods. Because of the shifts associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely influence the economy to reach equilibrium once the effects of the policy are fully realized.

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