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.
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.