Should the government use monetary and fiscal policy in an effort to stabilize the economy? The...

 

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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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in February 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using 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. PRICE LEVEL 150 130 110 8 70 50 20 22 24 LRAS 26 OUTPUT (Trillions of dollars) AS AD 28 30 AD AS ▼ policy. (?) Suppose that in February 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In July 2026, U.S. imports decrease because the United States has implemented trade restrictions on Mexican goods. Due to 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. 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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in February 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using 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. PRICE LEVEL 150 130 110 8 70 50 20 22 24 LRAS 26 OUTPUT (Trillions of dollars) AS AD 28 30 AD AS ▼ policy. (?) Suppose that in February 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In July 2026, U.S. imports decrease because the United States has implemented trade restrictions on Mexican goods. Due to 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.

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1a contractionary policy Here positive output because real GDP is greater than potential GD... View the full answer