Suppose that survey measures of consumer confidence show that a large wave of pessimism regarding the future performance of the economy is sweeping the country. Likewise, U.S. stock price indexes (the Dow Jones Industrial Index, the S&P 500 Index, and the Nasdaq) are all falling rapidly.
1. If, in the short run, policy makers do nothing, what will happen to U.S. aggregate demand and what especially would we expect to happen to the "Personal Consumption" and "Domestic Private Investment" components of U.S. aggregate demand? Explain.
2. What, again in the short run, should the Federal Reserve do if it wants to stabilize aggregate demand? Please be specific in your discussion of the specific policy tools that are available to the Fed.
3. If the Fed were to do nothing, what might the U.S. Congress do to stabilize aggregate demand? Again, please be specific.
4. If both the Federal Reserve and the Congress were to do nothing, what could the President do to stabilize U.S. aggregate demand?