A new president, who promised during the campaign that she would cut taxes, has just been elected. People trust that she will keep her promise, but expect that the tax cuts will be implemented only in the future. Determine the impact of the election on current output, the current interest rate, and current private spending under each of the assumptions in (a) through (c). In each case, indicate what you think will happen to Ye, re, and Te, and then how these changes in expectations affect output today.
a. The Fed will not change its policy.
b. The Fed will act to prevent any change in future output.
c. The Fed will act to prevent any change in the future interest rate.