Introduction to Macroeconomics

8. Government Fiscal and Monetary Policy - Sample Problems

Contents

1. Government Policy Options

1. Government Policy Options

1. What is discretionary demand-side policy?

   Answer: Discretionary demand-side policy is the use of fiscal or monetary policy by government agencies to change aggregate demand in order to dampen the swings in economic activity reflected by the business cycle. Whether demand management is effective or not is a much debated question that we will address in the following chapters.

2. Suppose that the economy is experiencing less than full employment. Utilizing the aggregate demand and aggregate supply theory developed in this chapter, explain the possible trade-offs that would have to be made in attaining full employment.

   Answer: A discretionary policy to reduce unemployment may include either increased government spending or an increase in the money supply in order to increase aggregate demand. In either case, the increase in aggregate demand may lead to a higher price level. This reflects the existance of conflicting goals. Reducing unemployment is often associated with increasing inflation.

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