In 1984 the US economy was showing signs of recovering from a period of recession. Unemployment rates were going down. Automobile sales and new home construction were increasing. Yet there were causes for concern. The federal debt was still very high, with indications that it might go higher. Interest rates were rising, and stock prices were unsteady. Volatile political situations in the Persian Gulf, Lebanon, and Central America were cited by President Reagan as reasons to increase defense spending. It was also suggested that the economy was already "overheated" and that inflationary pressures were on the increase.

Suggest a program that would serve to "cool" the economy without creating a recession, while providing for defense needs and human services programs.

1. Should taxes be increased or decreased? Would your tax proposal be designed to influence consumption, investment, or both?
2. Should government spending be increased or decreased? Would your tax proposal be designed to influence consumption, investment, or both?
3. What policies would you recommend that the Federal Reserve Board adopt in this situation?