Pros-cons of using tools to combat economic fluctuations

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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 February 2020.

Suppose the government decides to intervene to bring the economy back to the natural rate of output by using policy.

Suppose that in February the government undertakes the type of policy that is necessary to bring the economy back to the natural rate of output given in the previous scenario. In April 2020, U.S. imports increase because the United States has eliminated trade restrictions on Japanese goods. Because of the associated with implementing monetary and fiscal policy, the impact of the government’s new policy will likely once the effects of the policy are fully realized.

Reference no: EM13975062

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