Use of discretionary policy to stabilize the economy
Should policymakers use monetary policy, fiscal policy, or both 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 lessen 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 economy in February 2020. According to the graph, this economy is in________________________ . To bring the economy back to the natural rate of output, the government could use ___________________ monetary policy such as______________________.
Suppose that in February 2020, policymakers undertake the type of policy that is necessary to bring the economy back to the natural rate of output, given the scenario just described. In April 2020, imports decrease, because the United States has implemented trade restrictions on Japanese goods. Because of the______________________ associated with implementing monetary and fiscal policy, the impact of the policymakers' stabilization policy will likely________________________________ once the effects of the policy are fully realized.