Question: (a) Due to a technological boom and rapid expansion of the economy, the Federal Reserve Bank is pursuing a contractionary monetary policy. Using a graphical analysis, show the effects of this policy on the equilibrium interest rate, investment and output. Make sure you clearly label all the curves in your graphs and the initial and final equilibria.
(b) Due to a technological boom and rapid expansion of the economy, the Federal Government is pursuing a contractionary fiscal policy. Using a graphical analysis, show the effects of this policy on the equilibrium interest rate, investment and output. Make sure you clearly label all the curves in your graphs and the initial and final equilibria. Is there any crowding-out due to the contractionary fiscal policy?
Note: To answer both parts of this question you need to draw three graphs, one for each market: aggregate output, money market and investment market.