1. Suppose that is an effort to reduce the current U.S. federal government deficit, the President decides to sharply reduce government spending. Assuming the economy is in long-run equilibrium, explain and graph the short-run and long-run consequences on this policy on output and inflation.
2. (30 points) Based on your answers in question number 1, what should the Fed do to keep the inflation rate from changing? Explain and graph. What should the Fed do to keep output from changing? Explain and graph.
3. (20 points) In the early 1980s the U.S. government cut taxes and ran a budget deficit while the Fed reduced the money supply. What effect should these policies have on the inflation rate and income? Explain and graph
4. (30 points) Australia is going through a severe drought. What are the short-run and long run effects of this drought on the Australian economy and inflation? Explain and graph. What should the Reserve Bank of Australia Z (Central Bank) do stabilize inflation? What the Bank do to stabilize output