The Influence of Monetary and Fiscal Policy on Aggregate Demand 4

The Influence of Monetary and Fiscal Policy on Aggregate Demand 4

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Unformatted text preview: 4. Using policy to slabilize flle economy b0 The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. which ofthe following statements about the debate over stabilization policy are correct? Check at! that appfy. V C] Advocates of active stabilization believe that implementation lags for fiscal and monetary policy do not exist. V C] Advocates of active stabilization believe that automatic stabilizers have no effect on aggregate demand. V Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses. V C] Opponents of active stabilization believe that active fiscal and monetary policies have no effect on aggregate demand. fiPoints:—1{1 Explanation: Close Explanation A Critics and proponents of active stabilization believe that active monetary and fiscal policies operate with lags. According to critics, though, the lags are so long as to make stabilization policies ineffective. Critics argue that active policies may take effect at a time when they do more harm than good, exacerbating economic fluctuations. For example, by the time Congress recognizes a recession and passes an expansionary policy, and the policy affects aggregate demand, the recession may be over and the policy might lead to inflation. Both proponents and opponents of active stabilization agree that automatic stabilizers help to stabilize the economy. Automatic stabilizers are policies that influence the economy without the need for active decision making. The tax code is one example. Tax revenue automatically fills during recessions and increases during expansions, tending to stimulate economic activity during downturns and rein in the economy during periods of fast growth. Social programs, such as food stamps and unemployment insurance, also act automatically to stabilize the economy. which ofthe following are examples of automatic stabilizers? Check at! that appfy. V Unemployment insurance benefits V C] The federalfunds rate V C] The discount rate “Points—111 Explanation: Close Explanation A Automatic stabilizers are policies that influence the economy without the need for active decision making. The tax system is one example. Tax revenue automatically fills during recessions {because output and income fill) and increases during expansions {because output and income rise), so tax revenue tends to stimulate economic activity during downturns and rein in the economy during periods of fist growth. For example, as personal and corporate incomes fill during recessions, people and companies fice lower marginal income tax rates. Government expenditures on unemployment insurance benefits and welfire payments tend to increase during recessions as people ose theirjobs. The increase in benefits automatically counteracts a decline in aggregate demand. Two policies possibly mistaken for automatic stabilizers are the discount rate and the federal funds rate. Only the Fed can change the discount rate —this does not adjust automatically to changes in aggregate demand. ...
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