Policymakers who want to stabilize the economy must decide how much to change th

Question

Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. Which of the following are reasons why it is difficult for policymakers to choose the appropriate strength of their actions? Check all that apply. There are lags between when policy is changed and when it affects aggregate demand. It is difficult to anticipate how sensitive consumers and firms will be to the changes in policy. It is difficult to forecast the economy's future condition in response to a change in policy.

Explanation / Answer

Option A is correct.

This is because when any of the component of AD is changed, it takes time to realise the effect and there is a lag between the policy implementation and the effect. So the policymakers need to consider the appropriate strength so as to stabilise the economy.

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