hw3 handout - economy The Congress passed a substantial cut...

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ECON 2301.003 Principles of Macroeconomics Spring 2008 Homework 3 Due: April 10, 2008 at 1:00pm 1. What is stagflation? Illustrate it on an AS/AD diagram. Explain what happens when the fed increases to Ms during a period of stagflation. Explain what happens when the government lowers taxes during a period of stagflation. 2. For each of the following, tell a story using the goods market and money market models. 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
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Unformatted text preview: 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 George W. Bush signed the third tax cut in 3 years. Many of the tax cuts took effect in 2005. Assume Fed holds fixed. c. In 1993, the Congress and the president raised taxes. At the same time, the Fed was pursing an expansionary monetary policy. d. In 2005, conditions in Iraq led to a sharp drop in consumer confidence and a drop in consumption. Assume the Fed held money supply constant....
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