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. 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. 150 AS AD 130 110 AS AD₁ AD LRAS 20 24 26 30 OUTPUT (Trillions of dollars) Suppose that in May the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the preceding scenario. In September 2023, U.S. exports decrease because France implements trade restrictions on U.S. goods. Because of 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. PRICE LEVEL 90 70 50 22 2 28

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

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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 natural level of output in the preceding scenario. In September 2023, U.S. exports decrease because France implements trade restrictions on U.S. goods. Because of the_______(inflation/ lags/ consumer preferences) associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely _______________________(leave the US economy unchanged/ decrease the long-run production capacity/ 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.

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.
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.
150
AS
130
110
X
90
70
AD
LRAS
50
20
22
24
26
28
30
OUTPUT (Trillions of dollars)
Suppose that in May the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the
preceding scenario. In September 2023, U.S. exports decrease because France implements trade restrictions on U.S. goods. Because of 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.
PRICE LEVEL
9
0 2 0 2

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