Question

Policy rules proposed to stabilize an unstable economy include

Answer 1

To stabilize an unstable economy, a proposed policy rules must include expansionary and contractionary fiscal policies to shift aggregate demand in response to a recessionary gap and inflationary gap. Another policy is to increase government purchases for it can increase income, which in turn increases consumption. Then, a change in business taxes would increase in the investment tax credit or a reduction in corporate income tax rates, which will increase investments. In addition, income taxes should be lessen to increase consumption or buying power of consumer, which will affect the aggregate demand. Lastly, a policy rules in change in transfer payments should also be included for it can also change the aggregate demand curve of the economy.