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 as to whether the government should attempt to stabilize the economy.
1. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply.

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

b) The current tax system acts as an automatic stabilizer.

c) Businesses make investment plans many month in advance.

d) The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.


2. Which of the following are examples of automatic stabilization? Check all that apply.

a) Corporate income taxes

b) Personal income taxes

c) Unemployment insurance benefits

Answer 1

Answer:

1. a. b. and d.

2. a and c

Explanation:

Stabilizers can aggressively change fluctuations in the business cycle if they are not based on actual facts.

Automatic stabilizers are so called because they act to stabilize economic cycles and are automatically triggered without additional government action.