Question

6. Using policy to stabilize the economy 

The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy.

 

Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. 

• The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. 

• Businesses make investment plans many months in advance 

• The current tax system acts as an automatic stabilizer 

• Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. 

Which of the following are examples of automatic stabilizers? Check all that apply 

• Corporate income taxes 

• The discount rate 

• Unemployment insurance benefits

Answer 1

The following are arguments in favor of active stabilization policy:-

-The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates

-Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

The following are an example of automatic stabilizers:-

-Corporate income taxes

-Unemployment insurance benefits