1. Use of discretionary policy to stabilize the economy Should policymakers use monetary policy, fiscal policy, or both 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 lessen 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 March 2023. According to the graph, this economy is in . To bring the economy back to the natural level of output, the government 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. 150 LRAS AS AD 130 110 AS 90 AD 70 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in March 2023, 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 July 2023, exports decrease because Japan implements 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. PRICE LEVEL
1. Use of discretionary policy to stabilize the economy Should policymakers use monetary policy, fiscal policy, or both 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 lessen 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 March 2023. According to the graph, this economy is in . To bring the economy back to the natural level of output, the government 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. 150 LRAS AS AD 130 110 AS 90 AD 70 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in March 2023, 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 July 2023, exports decrease because Japan implements 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. PRICE LEVEL
Chapter24: Fiscal Policy
Section: Chapter Questions
Problem 5P
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Use of discretionary policy to stabilize the economy
Transcribed Image Text:1. Use of discretionary policy to stabilize the economy
Should policymakers use monetary policy, fiscal policy, or both 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 lessen 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 March 2023. According to the graph, this economy is in
. To bring the economy back to the natural
level of output, the government 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.
150
LRAS
AS
AD
130
110
AS
AD
70
50
20
22
24
26
28
30
OUTPUT (Trillions of dollars)
Suppose that in March 2023, 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 July 2023, exports decrease because Japan implements 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.
PRICE LEVEL
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