Problem
A group of policymakers have put forth a proposal to drastically increase the use of monetary and fiscal policy to stabilize the economy in Canada in the short run. Your team has been tasked by the Government of Canada to analyze their proposal and provide insight.
I. What is the case for active monetary and fiscal policy to stabilize an economy? Provide two specific economic events that may require stabilization through monetary or fiscal policy.
II. What is the case against active monetary policy? What is the case against active fiscal policy? Explain.
III. Can aggregate demand be stimulated when the economy enters a recession without policymakers having to implement new stabilization policies? Explain.