PRICE LEVEL 7. 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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in January 2026. Suppose the government chooses to intervene in order to return the economy 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. 150 AS AD 130 110 10 8 70 50 20 22 LRAS 24 26 OUTPUT (Trillions of dollars) AD 28 30 AS Suppose that in January 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In March 2026, U.S. imports increase because the United States has eliminated trade restrictions on Mexican goods. Due to 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.
PRICE LEVEL 7. 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, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in January 2026. Suppose the government chooses to intervene in order to return the economy 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. 150 AS AD 130 110 10 8 70 50 20 22 LRAS 24 26 OUTPUT (Trillions of dollars) AD 28 30 AS Suppose that in January 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In March 2026, U.S. imports increase because the United States has eliminated trade restrictions on Mexican goods. Due to 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.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter23: Aggregate Demand And Aggregate Supply
Section23.3: The Aggregate Demand Curve
Problem 3QQ
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Transcribed Image Text:PRICE LEVEL
7. 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, as well as the pros and cons of using these tools to combat economic fluctuations.
The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the
U.S. economy in January 2026.
Suppose the government chooses to intervene in order to return the economy 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.
150
AS
AD
130
110
10
8
70
50
20
22
LRAS
24
26
OUTPUT (Trillions of dollars)
AD
28
30
AS
Suppose that in January 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in
the previous question. In March 2026, U.S. imports increase because the United States has eliminated trade restrictions on Mexican goods. Due to 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.
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