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), shortrun aggregate supply (AS), and longrun 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 Y 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 successful/y restore the natural level of output. 150 - 0 AS 130 AD El d 110 A3 > LLl _l LL! 9 E 90 AD 70 LRAS 50 1 : : I i 20 22 24 26 28 so 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, consumer confidence decreases, leading to a decrease in consumer spending. Due to the V associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely V once the effects of the policy are fully realized. 8. Using policy to stabilize the economy The government possesses the tools necessary to influence the output level in the short run through use of monetary and fiscal policy. However, there is some debate regarding 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. Businesses make investment plans many months in advance. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Which of the following policies are examples of automatic stabilizers? Check all that apply. The federal funds rate Personal income taxes Unemployment insurance benefits