1. Use of discretionary policy to stabilize the economy In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, scal policy, or a combination of both? The following questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease economic uctuations. The following graph shows a hypothetical aggregate demand curve (AD), shortrun aggregate supply curve (AS), and longrun aggregate supply curve (LRAS) for the economy in June 2025. According to the graph, this economy is in V . To bring the economy back to the natural level of output, the Federal Open Market Committee {FOMC} could use V monetary or scal policy such as V . 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 June 2025. According to the graph, this economy is in . To bring the economy back to the natural level of output, the Federal Open Market Committee (FOMC) could use ry or fiscal policy such as an expansion a recession Shift the appropriate curve on the following graph to illustrate the effects of the pThe following graph shows a hypothetical aggregate demand curve (AD), shortrun aggregate supply curve (AS), and longrun aggregate supply curve {LRAS} for the economy in June 2025. According to the graph, this economyr is in V . To bring the economy back to the natural level of output, the Federal Open Market Committee (FOMC) could use V monetary or scal policyr such as V . a contractionary Shift the appropriate curve on the following graph to iiiustrate the you chose. an expansionary The following graph shows a hypothetical aggregate demand curve {AD}, shortrun aggregate supply curve (AS), and longrun aggregate supply curve (LRAS) for the economy in June 2025. According to the graph, this economy is in V . To bring the economy back to the natural level of output, the Federal Open Market Committee {FOMCJ could use V monetary or scal policy such as V . buying bonds Shift the appropriate curve on the following graph to illustrate the eects of the policy you chose. selling bonds (ZN Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose. 150 LRAS O AS AD 130 110 AS PRICE LEVEL 90 AD 70 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in June 2025, policymakers undertake the type of policy that is necessary to bring the economy back to the natural level of output, given the scenario just described. In October 2025, consumer confidence increases, leading to an increase in consumer spending. 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.OUTPUT (Trillions of dollars) inflation lags 2025, policymakers undertake the type of policy that is necessary to bring the economy back to the natural level of output, given political influence cribed. In October 2025, consumer confidence increases, leading to an increase in consumer spending. 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.fall short of the natural level of output push the economy beyond the natural level of output ' increase the long-run capacity to produce goods and services olicy that is necessary to bring the economy back to the natural level of output, given ce increases, leading to an increase in consumer spending. Because of the leave the economy unchanged and fiscal policy, the impact of the policymakers' stabilization policy will likely V once the effects of the policy are fully realized. 2. Fiscal policy Suppose some imaginary economy is currently experiencing deficient aggregate demand of $32 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are unable to decide which method of expansionary policy will resolve the situation. Economist One believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist Two believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist One 8 4 Economist Two 4 N Economist Three favors tax cuts over increases in government spending. This means that Economist Three likely believes that: O Tax cuts induce investment spending and improve workers' incentives. O A dollar in tax cuts immediately and fully adds to aggregate demand.Economist Three favors tax cuts over increases in government spending. This means that Economist Three likely believes that: O Tax cuts induce investment spending and improve workers' incentives. O A dollar in tax cuts immediately and fully adds to aggregate demand. Economist Four claims it is impossible to move the economy out of recession with an increase in government spending. Which of the following statements is consistent with Economist Four's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending