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 are arguments in favor of active stabilization policy by the government? Check all that apply.

The current tax system acts as an automatic stabilizer.

Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.

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

Businesses make investment plans many months in advance.

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

Corporate income taxes

The federal funds rate

Personal income taxes

Answer 1

Second option and third option are correct.

Changes in the government purchase and taxation are made to influence the aggregate demand under the active stabilization policy. These changes are brought about by administrative process and are not automatic. Similarly aggregate demand needs to be changed via active stabilization policy because automatic stabilizers are not sufficient to bring the long run equilibrium

Corporate income taxes and personal income taxes are automatic stabilizers because they attempt to stabilize the economy without any discretionary change by the government.