In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, fiscal policy, or a combination of both? The following questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease 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 economy in February 2025. According to the graph, this economy is in . To bring the economy back to the natural level of output, the Federal Open Market Committee (FOMC) could use monetary or fiscal policy such as Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose. PRICE LEVEL 150 130 19 8 g LRAS AS X AD | | 1 AD AS (?)

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1. Use of discretionary policy to stabilize the economy
In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, fiscal policy, or a combination of both? The following
questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease
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 economy in February 2025. According to the graph, this economy is in
. To bring the economy back to the natural
monetary or fiscal policy such as
level of output, the Federal Open Market Committee (FOMC) could use
Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose.
LRAS
AS
110
X
AD
70
22
24
26
OUTPUT (Trillions of dollars)
PRICE LEVEL
150
130
8
50
20
28
30
AD
AS
(?)
Suppose that in February 2025, policymakers undertake the type of policy that is necessary to bring the economy back to the natural level of output,
given the scenario just described. In June 2025, exports increase, because South Korea eliminates all trade restrictions on goods. Because of the
▼ associated with implementing monetary and fiscal policy, the impact of the policymakers' stabilization policy will likely
once the effects of the policy are fully realized.
Transcribed Image Text:1. Use of discretionary policy to stabilize the economy In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, fiscal policy, or a combination of both? The following questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease 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 economy in February 2025. According to the graph, this economy is in . To bring the economy back to the natural monetary or fiscal policy such as level of output, the Federal Open Market Committee (FOMC) could use Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose. LRAS AS 110 X AD 70 22 24 26 OUTPUT (Trillions of dollars) PRICE LEVEL 150 130 8 50 20 28 30 AD AS (?) Suppose that in February 2025, policymakers undertake the type of policy that is necessary to bring the economy back to the natural level of output, given the scenario just described. In June 2025, exports increase, because South Korea eliminates all trade restrictions on goods. Because of the ▼ associated with implementing monetary and fiscal policy, the impact of the policymakers' stabilization policy will likely once the effects of the policy are fully realized.
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