Should the government use monetary and fiscal policy in an effort to stabilize t
ID: 1205590 • Letter: S
Question
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 cots of using these took 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 2020. Suppose the government decidess to intervene to bring the economy back to the natural rate of output by using policy. Depending on which curve is affected by the government policy, shift either the AS curve or AD curve to reflect the change that would successfully restore the natural rate of output. Suppose that in May the government undertakes the type of policy that is necessary to bring the economy back to the natural rate of output given in the previous scenario. In September 2020, consumer confidence increases, leading to an increase in consumer spending. 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 are fully realized.Explanation / Answer
1. Expansionary fiscal policy
Expansionary fiscal policy will shift the AD to the right such that it intersects the AS curve at point where AS intersects LRAS.
2. externality
3. Crowd out or vanish
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