9. 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, and the pros and cons of using these tools to combat 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 U.S. economy in March 2023.

Suppose the government decides to intervene to bring the economy back 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.

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 AD 130 110 AS PRICE LEVEL 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars)