For each of the following, predict the effects on the equilibrium levels of aggregate output (Y) and the interest rate (r). Be sure you make predictions for both Y and r!
a. During 2000, the Federal Reserve was tightening monetary policy in an attempt to slow the economy. The Congress passed a substantial cut in the individual income tax at the same time.
b. During the summer of 2003, the Congress passed and President Bush signed the third tax cut in 3 years. Many of the tax cuts took effect immediately. Assume the Fed holds the money supply fixed.
c. In 1993, the Congress and the president raised taxes. At the same time, the Fed was pursuing an expansionary monetary policy.
d. In 2003, the Iraq War led to a sharp drop in consumer confidence and a drop in consumption. Assume 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.