For each of the following scenarios, tell a story and predict the effects on the equilibrium levels of aggregate output (Y) and the interest rate (r): a. During 2005, the Federal Reserve was tightening monetary policy in an attempt to slow the economy. Congress passed a substantial cut in the individual income tax at the same time. b. During the summer of 2003, Congress passed and President George W. Bush signed the third tax cut in 3 years. Many of the tax cuts took effect in 2005. Assume that the Fed holds Ms fixed. c. In 1993, the government raised taxes. At the same time, the Fed was pursuing an expansionary monetary policy.
For each of the following scenarios, tell a story and predict the
effects on the equilibrium levels of
interest rate (r):
a. During 2005, the Federal Reserve was tightening
policy
substantial cut in the individual income tax at the same time.
b. During the summer of 2003, Congress passed and President
George W. Bush signed the third tax cut in 3 years. Many of
the tax cuts took effect in 2005. Assume that the Fed holds
Ms fixed.
c. In 1993, the government raised taxes. At the same time, the
Fed was pursuing an expansionary monetary policy.
d. In 2005, conditions in Iraq led to a sharp drop in consumer
confidence and a drop in consumption. Assume that the Fed
holds the money supply constant.
e. The Fed attempts to increase the money supply to stimulate
the economy, but plants are operating at 65 percent of their
capacities and businesses are pessimistic about the future.
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