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 May 2023. According to the graph, this economy is in To bring the economy back to the natural level monetary or fiscal policy such as ▼ 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. 150 LRAS ICE LEVEL 130 110 AS 0 2 0 2

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 May 2023. According to the graph, this economy is in To bring the economy back to the natural level monetary or fiscal policy such as ▼ 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. 150 LRAS ICE LEVEL 130 110 AS 0 2 0 2

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 1PA

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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 May 2023. Suppose the government decides to intervene to bring the economy back to the natural level of output by using a ____________(contractionary policy/expansionary 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 May the government undertakes the type of policy that is necessary to bring the economy back to the…