7. Use of discretionary policy to stabilize the economy Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in May 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using policy. Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output. (?) 150 O AS 130 AD 110 AS PRICE LEVEL 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in May 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In November 2026, U.S. exports increase because Europe eliminates all trade restrictions on U.S. goods. Due to the associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely once the effects of the policy are fully realized. Grade It Now Save & Continue