1) Why should the bank use monetary and fiscal policy? 2) Why should the bank and the government stabilize the economy? 3) Why do economists argue that the government should avoid using monetary and fiscal policy? 4) What is automatic stabilizers? 5) How do long-run and short-run macroeconomic theories differ?

1)

The bank uses monetary and fiscal policy because of the following reasons:

• Monetary policy helps to know the prevailing interest rate, minimum reserve, etc set by the central bank.
• The fiscal policy helps to control the economy and this guides the banks that how much loan or interest should be charged to maintain the balance in the economy.

2)

The bank and the government stabilize the economy because when the bank and government ignore it, there may be the chances of huge inflation or recession in the economy. The bank and government stabilize the economy by restricting the flow of funds in the economy at the time of inflation and increases the flow of funds in the economy by providing loans at a low rate of interest, purchase of commercial papers, etc.

3)

The government uses monetary policy and the fiscal policy to control the economy but while implementing these policies, the government does not focus on the productivity, market, public, etc. For example, to decrease the aggregate demand in the economy, the government increases the tax rate. This decreases productivity as the companies and the employees are unmotivated and due to such reason, economists argue that the government should avoid using monetary and fiscal policy.

4)

The automatic stabilizers are the tool that works automatically without any intervention of policymakers of the government. It always maintains the balance in the economy. It is the ongoing fiscal policy that is controlled automatically.

5)

The long-run and short-run theories differ because in short-run the aggregate demand and the supply may be flexible and more profit can be earned, as more supply can be made as per the demand, increasing the working hours. But in the long run, the aggregate supply remains constant, as it is not possible to supply the goods to meet the aggregate demand for a long time.