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 May 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using policy. 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 50 30 130 110 8 70 80 50 20 20 22 24 LRAS 28 AS OUTPUT (Trillions of dollars) AD 28 30 AD ਵੇ ㅁ AS ? Suppose that in May 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In November 2026, consumer confidence decreases, leading to a decrease in consumer spending. 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.
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 May 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using policy. 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 50 30 130 110 8 70 80 50 20 20 22 24 LRAS 28 AS OUTPUT (Trillions of dollars) AD 28 30 AD ਵੇ ㅁ AS ? Suppose that in May 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In November 2026, consumer confidence decreases, leading to a decrease in consumer spending. 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.
Chapter10: Aggregate Demand And Supply
Section: Chapter Questions
Problem 3SQP
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Transcribed Image Text: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 May 2026.
Suppose the government chooses to intervene in order to return the economy to the natural level of output by using
policy.
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
50
30
130
110
8
70
80
50
20
20
22
24
LRAS
28
AS
OUTPUT (Trillions of dollars)
AD
28
30
AD
ਵੇ
ㅁ
AS
?
Suppose that in May 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the
previous question. In November 2026, consumer confidence decreases, leading to a decrease in consumer spending. 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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