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For each of the following, first indicate whether this is a change to fiscal or monetary policy; then explain in words and show using the
- For each of the following, first indicate whether this is a change to fiscal or monetary policy; then explain in words and show using the 45 degree line diagram how this change will affect Keynesian equilibrium output. Does the expenditure schedule experience a rotation or a parallel shift? If the latter, what components of autonomous expenditure change and why? Also, explain in one sentence why the government or Fed would undertake such a policy.
(a) The government increases transfer payments
(b) The government increases the income tax rate
(c) The Federal Reserve increases the federal funds rate from 0 percent to 2 percent
(d) The Federal Reserve buys long term bonds, reducing long-term interest rates (this is an example of quantitative easing)
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