Assignment task: The Bush-Greenspan policy mix
In 2001, the Fed pursued an expansionary monetary policy and reduced interest rates. At the same time, President George W Bush pushed through legislation that lowered income taxes.
Illustrate the effect of such a policy mix on output. (Using the IS-LM model).
How does this policy mix differ from the Clinton-Greenspan mix?
What happened to output in 2001?
How do you reconcile the fact that both fiscal and monetary polices were expansionary with the fact that growth was low in 2002? [Hint: think about policy dynamics)