Check Your Understanding

1. Question

   In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy:

   1. Several military bases around the country, which together employ tens of thousands of people, are closed.

   2. The number of weeks an unemployed person is eligible for unemployment benefits is increased.

   3. The federal tax on gasoline is increased.

2. Question

   Explain why federal disaster relief, which quickly disburses funds to victims of natural disasters such as hurricanes, floods, and large-scale crop failures, will stabilize the economy more effectively after a disaster than relief that must be legislated.

3. Question

   Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive—you get a brief high, but then you have the pain of inflation.”

   1. Explain what this means in terms of the AD–AS model.

   2. Is this a valid argument against stabilization policy? Why or why not?