Question

The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement to whether the government should attempt to stabilize the economy.Which of the following are arguments in favor of active stabilization policy by the government?a. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.b. Businesses make investment plans many months in advance.c. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.d. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

Answer 1

Answer: a. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.

d. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses

Explanation:

Stabilization policy is a policy that is used by the government to maintain a healthy economic growth level in the country and also prevent the economy from slowing down.

In the above scenario, the arguments in favor of active stabilization policy by the government will be that the The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates and that shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

It should be noted that pessimism on the economy will bring about economic downturns in the economy which will have a negative effect on the aggregate demand. These economic downturns aren't beneficial to the economy.

Also, optimism among consumers and businesses can lead to economic instability. This will therefore bring about calling for a stabilization policy that will tackle this.

Therefore, option A and D are the correct answers.