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 (an expansionary/a contractionary) 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. 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. exports decrease because Europe implements trade restrictions on U.S. goods. Due to the (consumer preferences/lags/inflation) associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely (decrease the long run production capcity/leave the U.S. economy unchanged/leave the economy above the natural level of output/push the economy below the natural level of output 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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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 (an expansionary/a contractionary) 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.

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. exports decrease because Europe implements trade restrictions on U.S. goods. Due to the (consumer preferences/lags/inflation) associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely (decrease the long run production capcity/leave the U.S. economy unchanged/leave the economy above the natural level of output/push the economy below the natural level of output once the effects of the policy are fully realized.

PRICE LEVEL
150
130
110
90
70
50
20
22
LRAS
24
26
OUTPUT (Trillions of dollars)
AS
AD
28
30
AD
0
AS
?

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