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, fiscal 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 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 June 2025. According to the graph, this economy is in ("an expansion" or "a recession") To bring the economy back to the natural level of output, the Federal Open Market Committee (FOMC) could use ("a contractionary" or "an expansionary") monetary or fiscal policy such as ("selling bonds" or "buying bonds").

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 28 30 OUTPUT (Trillions of dollars)fall short of the natural level of output increase the long-run capacity to produce goods and services push the economy beyond the natural level of output leave the economy unchanged