Chapter 20, Problem 3CYU

a)

To determine

The means in terms of the AD-AS model when using monetary or fiscal policy to pump up the economy is counterproductive.

Explanation of Solution

The use of monetary or fiscal policy pumps up the economy is counterproductive and a person has a high brief but after that, he/she gets the pain of inflation then, there would be an increase in aggregate demand and the means in terms of the AD-AS model will shift the aggregate demand curve to the right and then leading to inflation.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better. And, the monetary policy increases or decreases the supply of money with the control of interest rates.

b)

To determine

The reason whether it is a valid argument against the stabilization policy.

Explanation of Solution

No, it is not a valid argument against stabilization policy because both fiscal and monetary policies are useful and effective policy tools that help to void negative demand shocks in the economy. And, they can sort out the recessionary gap only by moving the aggregate demand curve back to the potential output, therefore, it is not a valid argument against stabilization policy in the economy.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better. And, the monetary policy increases or decreases the supply of money with the control of interest rates.