Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. True or False: One of the reasons why it is difficult for policymakers to choose the appropriate strength of their actions is that the impact of a change in policy on aggregate demand is often too fast. True False The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. If investors believed that capital taxes would remain low, the government's action would result in a capital stock. larger/smaller After investors have responded to the announced tax reduction, the government can get more tax revenue by capital investments. taxes on income from increasing/decreasing True or False: Given your answer to the previous part, investors would not believe the government's announcement.

Briefly discuss how time lag could be an argument against policy activism. What is the role of automatic stabilizer in this context?  Explain with examples

On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 trillion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) AS 106 105 104 103 63 102 101 100 99 98 AD AD 吕 1 97 96 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Trillions of dollars) AD 2 Equilibrium The initial short-run equilibrium level of real GDP is $ trillion, and the initial short-run equilibrium price level is Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the

1. Use of discretionary policy to stabilize the economy In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, fiscal policy, or a combination of both? The following questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease 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 economy in January 2025. According to the graph, this economy is in .To bring the economy back to the natural level of output, the government could use monetary or fiscal policy such as Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose. 150 LRAS AS 110 X AD 70 24 26 OUTPUT (Trillions of dollars) PRICE LEVEL 130 85 50 20 22 28 30 AD ロー AS ? Suppose that in January 2025, policymakers undertake the type of policy that is…

Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model.

Consider a potential fiscal policy used to curb a recession. How could a consumer and business expectations about the future economy could hamper those plans?

If a recession persists due to nominal wage and price stickiness (i.e., slow adjustment of nominal wages downward), what kind of fiscal policy can bring us out of this recession?     decreased government expenditures and increased taxes   increased government expenditures and decreased taxes   decreased government expenditures   contractionary fiscal policy

Fiscal Policy: Recessionary vs Expansionary Policy Complete the following exercises. 1. Describe a policy measure the government can use to close a recessionary gap. 2. Illustrate your response to question 1 in a graph. 3. Describe a policy measure the government can use to close an inflationary gap. 4. Please Illustrate Graphically in response to question (question 3: Describe a policy measure the government can use to close an inflationary gap.)

Using the concept in Keynesian economics, which one of the following may not be an effective fiscal policy when there is inflation? a) increasing aggregate demand b) increasing corporate taxes. c) increasing personal taxes. d) decreasing government purchases.

On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 billion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 H AS 1ŏ1 101 ADA 100 AD 3 99 AD 2 98 AD1 97 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Billions of dollars) Equilibrium (?)