Problem
1. During a recession, interest rates may fall even if the Fed takes no action to expand the money supply. Why? Use a graph to explain.
2. During the summer of 1997, Congress and the president agreed on a budget package to balance the federal budget. The "deal," signed into law by President Clinton in August as the Taxpayer Relief Act of 1997, contained substantial tax cuts and expenditure reductions. The tax reductions were scheduled to take effect immediately, however, while the expenditure cuts would come mostly in 1999 to 2002. Thus, in 1998, the package was seen by economists to be mildly expansionary. If the result is an increase in the growth of real output/income, what would you expect to happen to interest rates if the Fed holds the money supply (or the rate of growth of the money supply) constant? What would the Fed do if it wanted to raise interest rates? What if it wanted to lower interest rates? Illustrate with graphs.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.