Question

5. 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 statements regarding the debate over stabilization policy are correct? Check all that apply.
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.
Advocates of active stabilization believe that automatic stabilizers have no effect on aggregate demand.
Advocates of active stabilization believe that implementation lags for fiscal and monetary policy do not exist.
Opponents of active stabilization believe that active fiscal and monetary policies have no effect on aggregate demand.
Which of the following policies are examples of automatic stabilizers? Check all that apply.
Corporate income taxes
The discount rate
Unemployment insurance benefits

Answer 1

The arguments in favor active stabilization policy by the government are:

• The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.
• Shifts in aggregate demand are often the result of waves of permissions or optimism among consumers and business.

Active stabilization policy, particularly through the actions of the Federal Reserve, plays a crucial role in stabilizing the economy during periods of uncertainty and volatility.

When the economy faces excessive pessimism, characterized by prolonged periods of economic downturns or stagnation, the Fed can employ monetary tools such as open market operations to expand the money supply.

By doing so, they lower interest rates, making borrowing cheaper for businesses and consumers. This stimulates spending, investment, and economic activity and thereby effectively countering the negative impacts of pessimism.

The correct question is:

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. Changes in government purchases and taxation must be passed by both houses of congress and signed by the president. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interestrates. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Businesses make investment plans many months in advance.