Long–Run Consequences of Stabilization Policies

The aggregate demand curve would shift to the right, potentially creating an inflationary gap.

The aggregate demand curve would shift to the left, possibly resulting in a recessionary gap.

The aggregate demand curve remains unchanged as full employment constrains output.

The aggregate demand curve shifts to the right and then immediately back to its original position as automatic stabilizers take effect.

Capital outflow is likely to increase due to foreign investments becoming relatively more attractive.

Capital inflow decreases slightly before recovering due to long-term confidence in the economy’s stability.

Capital inflow increases as lower interest rates stimulate economic growth, attracting foreign investors.

There is no change in capital flow since interest rate changes influence only domestic investment.

It increases aggregate demand due to higher overall spending in the economy.

It fluctuates unpredictably as foreign investors adjust their portfolios.

It remains unchanged as increased government spending is offset by lower consumer confidence.

It decreases aggregate demand due to higher national debt interest rates crowding out private investment.

Inflation-targeted fiscal policy.

Neutral fiscal policy.

Expansionary fiscal policy.

Contractionary fiscal policy.

To decrease aggregate demand and reduce inflation

To increase government spending and reduce the deficit

To increase aggregate demand and reduce unemployment

To decrease taxes and reduce the national debt

Selling government bonds

Buying government bonds

Increasing the reserve requirement

Raising the discount rate

Import quotas

Fiscal stimulus

Open market operations

Government subsidies

Interest rate reductions

Government spending increases

Currency devaluation

Reserve requirement changes

There is a surge in consumer borrowing due to decreased interest rates.

Consumer saving rates decline sharply as a result of increased confidence.

Consumer borrowing becomes significantly less regulated.

It becomes more expensive for consumers to borrow.

Decreased interest rates

Expanded unemployment benefits

Infrastructure projects launched

Increased taxes