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Suppose that in March the government undertakes the type of policy that is necessary to bring...

Suppose that in March the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output given in the previous scenario. In July 2020, consumer confidence decreases, leading to a decrease in consumer spending. Because of the_______ (lags, Inflation, sales tax) associated with implementing monetary and fiscal policy, the impact of the government’s new policy will likely________(push the economy below the natural level of output, leave the economy above the natural level of output, leave the U.S. economy unchanged, decrease the long-run production capacity) once the effects of the policy are fully realized.

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Answer.

Because of the lags (lags, Inflation, sales tax) associated with implementing monetary and fiscal policy, the impact of the government’s new policy will likely push the economy below the natural level of output (push the economy below the natural level of output, leave the economy above the natural level of output, leave the U.S. economy unchanged, decrease the long-run production capacity) once the effects of the policy are fully realized.

The government will undertake the contractionary monetary policy to bring the economy back to the natural level of output. This will lead to shifting the aggregate demand to the left.

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