The govermment has the ability to influence the level of output in the short run

Question

The govermment has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. O The current tax system acts as an automatic stabilizer. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following are examples of automatic stabilizers? Check all that apply. Personal income taxes The discount rate The federal funds rate

Explanation / Answer

Both the answers are correct.

Automatic stabilizers helps to bring changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action. They can aggressively change the fluctuations in the business cycles and can be implemented easily.

Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses is the argument in favor of active stabilization policy by the government.

Personal income taxes are example of automatic stabilizers.

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