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ps4 - Name SID Discussion Section Problem Set#4 Due...

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Problem Set #4 (Fall 2006) 1 Name: _______________________ SID: _______________________ Discussion Section: _______________________ Problem Set #4 Due Thursday, October 19, 2006 Problem Sets MUST be word-processed except for graphs and equations. QUESTIONS 1. In 2000, the economy was in equilibrium at its potential output level but there was a big government budget surplus that policymakers wanted to reduce. On a single IS-LM diagram, clearly show the effects on equilibrium income and interest rates of the following 2 scenarios. Be sure to provide a brief economic explanation for the different results of these 2 scenarios. a. Scenario #1: A large decrease in tax rates (in red). b. Scenario #2: A large increase in government spending (in blue). Now, assume that the Federal Reserve followed a stabilizing policy, i.e., it used monetary policy to keep the economy at its potential output level. On your IS-LM diagram, clearly show how this would affect equilibrium income and interest rates for the change in tax rates (in green) and the change in government spending (in orange or brown).
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