Problem Set 1 – Econ 225, Sections 002 and 003Chapter 5 – Questions 6, 7, 96) The Bush-Greenspan Policy Mix: in 2001, the Fed pursued a very expansionary monetarypolicy. At the same time, President George W.
...
Problem Set 1 – Econ 225, Sections 002 and 003
Chapter 5 – Questions 6, 7, 9
6) The Bush-Greenspan Policy Mix: in 2001, the Fed pursued a very expansionary monetary
policy. At the same time, President George W. Bush pushed through legislation that lowered
income taxes.
a) Illustrate the effect of such a policy mix on output.
By lowering income taxes, consumptions increases therefore the output increases as well.
Decrease in T shifts the IS curve to the right. An expansionary monetary policy means that
M will be increased, an increase in M would shift LM curve down, therefore brining the
interest rate down. Overall output increases.
b) Describe how this policy mix differs from the Clinton-Greenspan mix (described
earlier in chapter 5) – illustrate the effects of this in a separate IS/LM diagram.
Clinton-Greenspan policy included a contractionary fiscal policy that would shift IS left and
an expansionary monetary policy which would shift LM curve down.
c) What happened to output in 2001? How do you reconcile the fact that both fiscal
and monetary policies were expansionary with the fact that growth was so low in
2002? Illustrate the effect of this in an IS/LM diagram.
In 2001 there was a recession which was caused by a decrease in investment spending and
then later on there was a decline in the stock market. The expansionary monetary and fiscal
policies were supposed to decrease the effect of the recession by unfortunately they were
applied too late and the recession was unavoidable.
7) Policy Mixes – suggest a policy mix to achieve each of the following objectives:
a) Increase Y while keeping i constant.
Increase in G or decrease in T would shift IS curve to the right and then increase in M would
shift the LM curve down and therefore the output is increased while the interest rate stayed
the same.
b) Decrease the fiscal deficit while keeping Y constant. What happens to i? To
investment?
In order to achieve this state we should reduce government spending or increase
taxes which would shift the IS curve to the left. Then we should increase M which
would shift the LM curve down. The interest rate would fall and since the interest
rate fell the investment would increase. And the output stayed the same.
9) The Clinton-Greenspan policy mix: As described in this chapter, during the Clinton
administration the policy mix changed toward more contractionary fiscal policy and more
expansionary monetary policy. This question explores the implications of this change in the
policy mix, both in theory and fact.
a) Suppose G falls, T rises, and M increases, and that this combination of policies has no
effect on output. Show the effects of these policies in an IS/LM diagram. What
happens to the interest rate? What happens to investment?
Well the decrease in G and an increase in T would shift LS curve to the left. The
increase in M would shift the LM curve down. Therefore the interest rate would fall
and therefore investment would increase.
b) Go to the website Economic Report of the President (www.gpoaccess.gov/eop). Look
at Table B-79 in the statistical appendix. What happened to federal receipts (tax
revenues), federal outlays, and the budget deficit as a percentage of GDP over the
period 1992 to 2000? (Note that federal outlays include transfer payments, which
would be excluded from variable G, as we define it in our IS/LM model. Ignore the
difference.)
Receipts rose, outlays fell and the budget deficit fell as well.
c) The Federal Reserve Board of Governors posts the recent history of the federal funds
rate at http://www.federalreserve.gov/releases/h15.data.htm. You will have to
choose to look at the rate on a daily, weekly, monthly, or annual interval. Look at the
years between 1992 and 2000. When did monetary policy become more
expansionary?
In September 4,1992 the FFR was 3 % then it started increasing until February 1,
1995 when it hit 6% and then until the year of 2000 it was playing between 5 and 6
going up and down by basic 25 points. Between those years the lost it got was 4.75
in November 17, 1998.
[Show More]
