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 Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Businesses make investment plans many months in advance. The current tax system acts as an automatic stabilizer. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Which of the following are examples of automatic stabilizers? Check all that apply. Corporate income taxes Personal income taxes The discount rate

These shifts in the aggregate demand are results of the waves of pessimism that leads to economic downturn. They exert unnecessary pressure on the economy.

Similarly, shifts in aggregate demand that are the result of waves of consumer and business optimism are also burdensome and bring about instability.

To make economy more stable, active stabilization policy tools that mitigate the impact of pessimism and optimism wave are advocated.

The waves of pessimism among consumer and businesses lead to the fall in aggregate demand. This fall in aggregate demand can be partially or fully offset by increasing money supply because increase in money supply boosts aggregate demand.

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

Also the Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.

Recession only reduces personal taxes, and that is an automatic boost to aggregate demand in the event of recession.

∴ Personal income taxes is an example of automatic stabilizers.