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. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.
c. Businesses make investment plans many months in advance.
d. The current tax system acts as an automatic stabilizer.

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

a. Corporate income taxes
b. The discount rate
c. Personal income taxes

Answer 1

Answer:

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

a. Corporate income taxes and c. Personal income taxes

Explanation:

1. The waves of pessimism or optimism among consumers and businesses deals with the behavior and perception of economic agents i.e. the household and the firm. the existence of confidence and the lack of same with determine whether to consume or invest. the action of these economic agents can move the economic from equilibrium and it is government duty to introduce some active relevant stabilization policy  to redirect the economy towards stability.

2. Automatic stabilizers are inbuilt mechanism embedded in government spending and tax imposition that is capable of redirecting the economy into stability during economic recession without authorization by parliament. the most popular among this tool is corporate income tax and personal income tax. During recession the automatic stabilizer will stimulate demand and when the economy is over-inflated, it will mop up excess liquidity from the economy.

2.