Question

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 of the following are arguments in favor of active stabilization policy by the government? Check all that apply.

Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.

Businesses make investment plans many months in advance.

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 are examples of automatic stabilizers? Check all that apply.

Personal income taxes

The discount rate

Unemployment insurance benefits

Answer 1

The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.

Unemployment insurance benefits

Step-by-step explanation:

Fiscal policy are policies enacted by the government to stabilise the economy using taxes and government spending.

Automatic government stabilizers are fiscal policies enacted automatically when there are changes in the economy. They include:

1. progressive income or corporate taxes

2. Transfer payments e.g. Unemployment insurance benefits

The issues with fiscal policy includes:

1. Policy lag: it takes time for a proposed policy to be implemented. It has to pass through a lot of approvals before it is implemented.

2. Forecasting: it is difficult to accurately forecast the economy.

3. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

I hope my answer helps you.