7. Use of discretionary policy to stabilize the economy Should the government us

Question

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 February 2020 Suppose the government decides to intervene to bring the economy back 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. 150 AS AD 130 -110 AS Cr 70 LRAS 50 20 26 28 30 OUTPUT (Trillions of dollars) Suppose that in February the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output given in the previous scenario. In April 2020, U.S. imports increase because the United States has eliminated trade restrictions on Japanese goods Because of the likely associated with implementing monetary and fiscal policy, the impact of the government's new policy will once the effects of the policy are fully realized

Explanation / Answer

1. contractionary monetary or fiscal policy. These policies will shift the AD curve downward and we will reach our Natural rate of output and employment. We will have a lower ROI

2. Lags

3. decrease the long-run production capacity since import restriction have been revoked so it is earier for the firms to plan according to the new policy regime and there by reduce long run production capacity in the particular industry

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