During the early 1990s, the Clinton administration sought to reduce the government budget deficit. a. Name the ways in which the government can decrease the deficit. It may be helpful to write down the deficit formula. b. Show how these policies would impact the economy in the short-run and long-run using an AD/AS diagram. c. In the absence of other policies, what is the self-correcting mechanism that would take the economy that would take the economy from the short-run to the long- run? Do you expect this mechanism to require a long time to work or a short time?

3. As the Chair of the Fed, your job is to respond to the policies mentioned in question 2. a. Suppose that you are an activist economist. What kind of monetary policy would you want to pursue if Clintons policies are enacted? Why? b. Name the specific monetary policy tools and exactly how you would use them to accomplish your goal in part (a). c. How would your monetary policy impact interest rates? Show your answer using a graph of the money market with M