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. Which of the following statements about the debate over stabilization policy are correct?
a. Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses.
b. Advocates of active stabilization believe that implementation lags for fiscal and monetary policy do not exist.
c. Opponents of active stabilization believe that active fiscal and monetary policies have no effect on aggregate demand.
d. Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.

Answer 1

Answer:

• a. Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses.
• d. Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.

Explanation:

Those who believe the government should engage in stabilization policies believe that it is necessary for the government to do so because it would limit the excessive sentiments of consumers and businesses such as optimism and pessimism which affect the economy significantly as they govern consumer behavior and can either overheat the economy or lead to it underperforming.

Opponents however believe that the time it takes between the implementation of such policies and the time the policy's effects are seen, lead to worse economic fluctuations that could be avoided if the government simply stopped trying to stabilize the economy.