1.2.1 In each of the following cases, explain what would likely happen to the equilibrium level of the aggregate output

(Y) and the interest rate (r):

a. Faced with a likely recession, country A’s government and central bank decide to act jointly by increasing government expenditure on infrastructure and launching a new bond acquisition program (by the central bank).

b. Country B’s government decides to reduce the debt-to-

GDP ratio by implementing austerity policies consisting of public spending cuts and tax increases. To alleviate the impact of fiscal policy on output and employment, the central bank expands money supply.

c. In country C, growing concerns about the stability of the banking sector have led the central bank to significantly increase the reserve requirement rate.

d. Consumer confidence is rapidly increasing in country D, signaling the end of recession. The central bank maintains the money supply constant.

e. Sluggish demand at home prompts the government of country E to increase public expenditure, while the central bank proceeds to sell government securities in an effort to reduce money supply.