Using policy to stabilize the economy 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?
A. Businesses make investment plans many months in advance.
B. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.
C. The current tax system acts as an automatic stabilizer.
D. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.
2. Which of the following are examples of automatic stabilizers?
A. The federal funds rate.
B. Unemployment insurance benefits.
C. Corporate income taxes.
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